Question

Using the Du Pont method, evaluate the effects of the following relationships for the Butters Corporation. a. Butters Corporation has a profit margin of 3.5 percent and its return on assets (investment) is 12.75 percent. What is its assets turnover? (Round your answer to 2 decimal places.) Assets turnover ratio [ times b. If the Butters Corporation has a debt-to-total-assets ratio of 75.00 percent, what would the firm's return on equity be? (Input your answer as a percent rounded to 2 decimal places.) Return on equity c. What would happen to return on equity if the debt-to-total-assets ratio decreased to 70.00 percent? (Input your answer as a percent rounded to 2 decimal places.) Return on equity 0 %

Answer 1

a. Assets turnover ratio = Return on assets / Profit margin = 0.1275 / 0.035 = 3.64 times

b. Return on equity = Return on assets / (1 − Debt-to-total assets ratio) = 0.1275 / (1 − 0.75) = 0.5100 or 51.00%

c. Return on equity = Return on assets / (1 − Debt-to-total assets ratio) = 0.1275 / (1 − 0.70) = 0.4250 or 42.50%