A sheaf of papers in his hand, your friend and colleague, Landon, steps into your office and asked the following. LANDON: Do you have 10 or 15 minutes that you can spare? YOU: Sure, I've got a meeting in an hour, but I don't want to start something new and then be interrupted by the meeting, so how can I help? LANDON: I've been reviewing the company's financial statements and looking for ways to improve our performance, in general, and the company's return on equity, or ROE, in particular. Amelia, my new team leader, suggested that I start by using a DuPont analysis, and I'd like to run my numbers and conclusions by you to see whether I've missed anything. Here are the balance sheet and income statement data that Amelia gave me, and here are my notes with my calculations. Could you start by making sure that my numbers are correct? YOU: Give me a minute to look at these financial statements and to remember what I know about the DuPont analysis. Income Statement Data $14,000,000 Sales Cost of goods sold Gross profit Operating expenses Balance Sheet Data Cash $700,000 Accounts payable $840,000 Accounts receivable 1,400,000 Accruals 280,000 Inventory 2,100,000 Notes payable 1,120,000 Current assets 4,200,000 Current liabilities 2,240,000 Long-term debt 3,640,000 Total liabilities 5,880,000 Common stock 980,000 Net fixed assets 5,600,000 Retained earnings 2,940,000 3,920,000 Total assets $9,800,000 Total debt and equity $9,800,000 EBIT 7,000,000 7,000,000 3,500,000 3,500,000 571,200 2,928,800 732,200 Interest expense EBT Taxes Total equity Net income $2,196,600 net profit margin the total asset If I remember correctly, the DuPont equation breaks down our ROE into three component ratios: the turnover ratio, and the equity multiplier . And, according to my understanding of the DuPont equation and its calculation of ROE, the three ratios provide insights into the company's use of debt versus equity financing effectiveness in using the company's assets, and control over its expenses 1 Now, let's see your notes with your ratios, and then we can talk about possible strategies that will improve the ratios. I'm going to check the box to the side of your calculated value if your calculation is correct and leave it unchecked if your calculation is incorrect. Hydra Cosmetics Inc. DuPont Analysis Value Correct/Incorrect Value Correct/Incorrect Ratios Asset management ratio Total assets turnover 50.00 1.43 Ratios Profitability ratios Gross profit margin (%) Operating profit margin (%) Net profit margin (%) Return on equity (%) 20.92 22.41 Financial ratios 53.52 Equity multiplier 1.67 LANDON: OK, it looks like I've got a couple of incorrect values, so show me your calculations, and then we can talk strategies for improvement. YOU: I've just made rough calculations, so let me complete this table by inputting the components of each ratio and its value: Do not round intermediate calculations and round your final answers up to two decimals. Check all that apply. Increase the interest rate on its notes payable or long-term debt obligations because it will reduce the company's net profit margin. Use more equity financing in its capital structure, which will increase the equity multiplier. Decrease the amount of debt financing used by the company, which will decrease the total assets turnover ratio. Reduce the company's operating expenses, its cost of goods sold, and/or the interest rate on its borrowed funds because this will increase the company's net profit margin. LANDON: I think I understand now. Thanks for taking the time to go over this with me, and let me know when I can return the favor