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e | ?Not secure l ezt. tion.com/hm.tpx here on the ks bar. I 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.) 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.) he 0511% c. What would happen to retum 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 References eBook & Resources Hint et

Solution

Answer to Part a.

Return on Investment = Profit Margin * Assets Turnover Ratio
12.75 = 3.5 * Assets Turnover Ratio
Assets Turnover Ratio = 3.64 times

Answer to Part b.

Debt to Total Assets Ratio = 75%
Equity to Total Assets Ratio = 1 - Debt to Total Assets Ratio
Equity to Total Assets Ratio = 1 – 0.75 = 0.25 or 25%

Equity Multiplier = 1 / Equity to Total Assets Ratio
Equity Multiplier = 1 / 0.25
Equity Multiplier = 4

Return on Equity = Profit Margin * Assets Turnover Ratio * Equity Multiplier
Return on Equity = 3.5% * 3.64 * 4
Return on Equity = 50.96%

Answer to Part c.

Debt to Total Assets Ratio = 70%
Equity to Total Assets Ratio = 1 - Debt to Total Assets Ratio
Equity to Total Assets Ratio = 1 – 0.70 = 0.30 or 30%

Equity Multiplier = 1 / Equity to Total Assets Ratio
Equity Multiplier = 1 / 0.30
Equity Multiplier = 3.33

Return on Equity = Profit Margin * Assets Turnover Ratio * Equity Multiplier
Return on Equity = 3.5% * 3.64 * 3.33
Return on Equity = 42.42%