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Chapter 2: 15BPb (page 80)

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

b. If the Butters Corporation has a debt-to-total-assets ratio of 50 percent, what

would the firm鈥檚 return on equity be?

Short Answer

Expert verified

Return on equity: 50.40%

Step by step solution

01

Debt-to-total asset ratio

The debt to total asset ratio is computed to compare the company鈥檚 debt obligation with the company鈥檚 total assets.

02

Calculate the return on equity

Returnonequity=Returnonassets1-DebtAssets=25.2%1-0.50=50.40%

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Most popular questions from this chapter

For December 31, 20X1, the balance sheet of Baxter Corporation was as follows:

Current assets

Liabilities

Cash

\(15,000

Accounts payable

\)17,000

Accounts receivable

20,000

Notes payable

25,000

Inventory

30,000

Bonds payable

55,000

Prepaid expenses

12,500

Fixed assets

Stockholder鈥檚 equity

Plant and equipment (gross)

Less: accumulated depreciation

\(255,000

51,000

Preferred stock

\)25,000

Net plant and equipment

\(204,000

Common stock

60,000

Paid in capital

30,000

Retained earnings

69,500

Total assets

\)281,500

Total liabilities and stockholder鈥檚 equity

\(281,500

Sales for 20X2 were \)245,000, and the cost of goods sold was 60 percent of sales. Selling and administrative expense was \(24,500. Depreciation expense was 8 percent of plant and equipment (gross) at the beginning of the year. Interest expense for the notes payable was 10 percent, while the interest rate on the bonds payable was 12 percent. This interest expense is based on December 31, 20X1 balances. The tax rate averaged 20 percent.

\)2,500 in preferred stock dividends were paid, and \(5,500 in dividends were paid to common stockholders. There were 10,000 shares of common stock outstanding.

During 20X2, the cash balance and prepaid expenses balances were

unchanged. Accounts receivable and inventory increased by 10 percent. A new machine was purchased on December 31, 20X2, at a cost of \)40,000. Accounts payable increased by 20 percent. Notes payable increased by \(6,500 and bonds payable decreased by \)12,500, both at the end of the year. The preferred stock, common stock, and paid-in capital in excess of par accounts did not change.

c. Prepare a balance sheet as of December 31, 20X2.

Easter Egg and Poultry Company has \(2,000,000 in assets and \)1,400,000 of debt. It reports net income of $200,000.

c. If the firm has an asset turnover ratio of 2.5 times, what is the profit margin

(return on sales)?

Stilley Corporation had earnings after taxes of \(436,000 in 20X2 with 200,000 shares outstanding. The stock price was \)42.00. In 20X3, earnings after taxes declined to \(206,000 with the same 200,000 shares outstanding. The stock price declined to \)27.80.

a. Compute earnings per share and the P/E ratio for 20X2.

b. Compute earnings per share and the P/E ratio for 20X3.

c. Give a general explanation of why the P/E changed. You might want to

consult the text to explain this surprising result.

What advantage does the fixed charge coverage ratio offer over simply using times interest earned?

In 20X2, sales increased to \(5,740,000 and the assets for that year were as follows:

Cash

\)163,000

Accounts receivable

924,000

Inventory

1,063,000

New plant and equipment

520,000

Total assets

$2,670,000

Once again compute the four ratios

b. Compute the following:

1. Accounts receivable turnover.

2. Inventory turnover.

3. Fixed asset turnover.

4. Total asset turnover.
See all solutions

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