Question

Using the Du Pont method evaluate the effects of the following relationships for the company.

A. Butters Corporation has a profit margin of 7 percent and its return on assets ( investments) is 25.2. What is its assets turnover

B. If the Butters corporation has a debt to total assets ratio of 50 percent, what would the firms return on equity be?

C. What would happen to return on equity if the debt to total assets ratio decreased to 35 percent?

Answer 1

Step-by-step explanation:

A. Profit margin*Total asset turnover=Return on assets(investment)

0.07*TAT=25.2

TAT=360

B. Return on equity=Return on assets/(1-debt/assets)=25.2/(1-0.5)=50.40%

C. Return on equity=Return on assets/(1-debt/assets)=25.2/(1-0.35)=38.77%