CHLOE: 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? CHLOE: I've been reviewing the company's financial statements and looking for general ways to improve our performance, in general, and the company's return on equity, or ROE, in particular. Eric, 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 if I've missed anything. Here are the balance sheet and income statement data that Eric 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 Cash Balance Sheet Data $500,000 1,000,000 Sales Accounts receivable $600,000 200,000 800,000 Cost of goods sold Inventory Current assets Gross profit 1,500,000 3,000,000 1,600,000 Operating expenses EBIT Accounts payable Accruals Notes payable Current liabilities Long-term debt Total liabilities Common stock Retained earnings Total equity Total debt and equity $10,000,000 5,000,000 5,000,000 2,500,000 2,500,000 366,000 2,134,000 746,900 $1,387,100 Interest expense EBT 2,250,000 3,850,000 787,500 2,362,500 3,150,000 $7,000,000 Net fixed assets 4,000,000 Taxes Net income Total assets $7,000,000 If I remember correctly, the DuPont equation breaks down our retum on equity (ROE) into three component ratios: the the ratio, and the 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. In the following table, select whether each of the ratios is correct or incorrect. Pavo Media Systems Inc.DuPont Analysis Ratios Value Correct/Incorrect Value Correct/Incorrect Ratios Asset management ratio Total assets turnover 50.00 1.43 Profitability ratios Gross profit margin (96) Operating profit margin (%) Net profit margin (%) Return on equity (%) 21.34 19.82 Financial ratios Equity multiplier 51.58 1.82 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: Numerator Calculation Denominator Value Pavo Media Systems Inc.DuPont Analysis Ratios Profitability Ratios Gross profit margin (%) Operating profit margin (%) Net profit margin (%) Return on equity (%) Numerator Calculation Asset management ratio Total assets turnover Denominator Value Financial ratios Numerator Calculation Denominator value 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 embarrassmenti Eric would have been very disappointed in me if I had him showed my original work. So, now let's switch topics and identify general strategies that could be used to positively affect Pavo'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? improve the company's ROE? Check all that apply. Decrease the company's use of debt capital because it will decrease the equity multiplier, Use more debt financing in its capital structure and increase 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 tumover 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