Using the Du Pont method, evaluate the effects of the following relationships fo

Question

Using the Du Pont method, evaluate the effects of the following relationships for the Butters Corporation.

Butters Corporation has a profit margin of 8 percent and its return on assets (investment) is 17.75 percent. What is its assets turnover? (Round your answer to 2 decimal places.)

If the Butters Corporation has a debt-to-total-assets ratio of 30.00 percent, what would the firm’s return on equity be? (Input your answer as a percent rounded to 2 decimal places.)

What would happen to return on equity if the debt-to-total-assets ratio decreased to 25.00 percent? (Input your answer as a percent rounded to 2 decimal places.)

Butters Corporation has a profit margin of 8 percent and its return on assets (investment) is 17.75 percent. What is its assets turnover? (Round your answer to 2 decimal places.)

Explanation / Answer

a. Asset turnover ratio = Return on Assets / Profit margin

= 17.75% / 8%

= 2.22

b. Return on equity = Return on Assets / (1 - Debt-to-Total assets)

= 17.75% / (1 - 30%)

= 25.36%

c. Return on equity = Return on Assets / (1 - Debt-to-Total assets)

= 17.75% / (1 - 25%)

= 23.67%

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