Ch 04: Assignment - Analysis of Financial Statements Balance Sheet Data Income Statement Data Cash $600,000 Accounts payable pols $720,000 Sales $12,000,000 Accounts receivable 1,200,000 Accruals 240,000 Cost of goods sold Inventory 1,800,000 Notes payable 7,200,000 4,800,000 960,000 Gross profit Current assets 3,600,000 Current liabilities 1,920,000 Operating expenses Long-term debt 3,000,000 1,800,000 2,400,000 EBIT Total liabilities 4,320,000 Interest expense 403,200 Common stock 720,000 EBT 1,396,800 Net fixed assets 3,600,000 Retained earnings 2,160,000 Taxes 349,200 Total equity 2,880,000 Net income $1,047,600 Total assets $7,200,000 Total debt and equity $7,200,000 cory If I remember correctly, the DuPont equation breaks down our ROE into three component ratios: the turnover ratio, and the the total asset And, according to my understanding of the DuPont equation and its calculation of ROE, the three ratios provide insights into the company's effectiveness in using the company's assets, and 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 Halysis of Financial Statements Hydra Cosmetics Inc. DuPont Analysis Ratios Value Correct/Incorrect Ratios Value Correct/Incorrect Asset management ratio 40.00 Total assets tumover 1.67 Profitability ratios Gross profit margin (%) Operating profit margin (%) Net profit margin (%) Return on equity (%) 11.64 14.55 Financial ratios 40.58 Equity multiplier 1.67 CHLOE: 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. Hydra Cosmetics Inc. DuPont Analysis UI Flancial Statements Do not round intermediate calculations and round your final answers up to two decimals. Hydra Cosmetics Inc. DuPont Analysis ols Ratios Calculation Value Numerator Denominator Profitability ratios Gross profit margin (%) Operating profit margin (%) Net profit margin (%) IN Return on equity (%) Asset management ratio Total assets turnover Financial ratios tory Equity multiplier CHLOE: I see what I did wrong in my computations. Thanks for reviewing these calculations with me. You saved me from a lot of embarrassment! Eric would have been very disappointed in me if I had showed him my original work. So, now let's switch topics and identify general strategies that could be used to positively affect Hydra's ROE. YOU: OK, so given your knowledge of the component ratios used in the DuPont equation, which of the following strategies should improve the company's ROE? Check all that apply. O Use more equity financing in its capital structure, which will increase the equity multiplier. Decrease the company's use of debt capital because it will decrease the equity multiplier. Increase the efficiency of its assets so that it generates more sales with each dollar of asset investment and increases the company's total assets turnover. O 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. CHLOE: 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