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 5.5 percent and its return on assets (investment) is 15.5 percent. What is its assets turnover? (Round your answer to 2 decimal places.)
  

  

b. If the Butters Corporation has a debt-to-total-assets ratio of 25.00 percent, what would the firm’s return on equity be? (Input your answer as a percent rounded to 2 decimal places.)
  

     

c. What would happen to return on equity if the debt-to-total-assets ratio decreased to 20.00 percent? (Input your answer as a percent rounded to 2 decimal places.)
  

Answer 1

Butters Corporation has a profit margin of 5.5 percent and its return on assets (investment) is 15.5 percent. What is its assets turnover?

Total asset turnover = Return on assets / Profit margin =15.5%/5.5%=2.82 times

If the Butters Corporation has a debt-to-total-assets ratio of 25.00 percent, what would the firm’s return on equity be?

Return on equity = Return on assets / (1 − Debt-to-total assets ratio)=15.5%/(1-25%)=20.67%

c. What would happen to return on equity if the debt-to-total-assets ratio decreased to 20.00 percent

Return on equity = Return on assets / (1 − Debt-to-total assets ratio)=)=15.5%/(1-20%)=19.38%