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 14.5 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 65.00 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 50.00 percent? (Input your answer as a percent rounded to 2 decimal places.)

Answer 1

a.

Asset Turnover = ROA/Net Profit Margin

Asset Turnover = 0.145/0.055

Asset Turnover = 2.64

b.

Debt/Asset = 0.65

1 - Debt/Asset = 1 - 0.65

Equity/Asset = 0.35

Asset = Equity/0.35

ROA = 0.145

ROA = (Net Profit/Equity)0.35

ROE = 0.145/0.35

ROE = 41.43%

c.

Debt/Asset = 0.50

1 - Debt/Asset = 1 - 0.50

Equity/Asset = 0.50

Asset = Equity/0.50

ROA = 0.145

ROA = (Net Profit/Equity)0.50

ROE = 0.145/0.50

ROE = 29.00%