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 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 whether 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. ... Cash Accounts receivable Inventory Current assets Balance Sheet Data $1,100,000 Accounts payable 2,200,000 Accruals 3,300,000 Notes payable 6,600,000 Current liabilities Long-term debt Total abilities Common stock 6,600,000 Retained earnings Total equity $13,200,000 Total debt and equity $1,320,000 440,000 1,760,000 3,520,000 3,740,000 7,260,000 1,485,000 4,455,000 5,940,000 $13,200,000 Income Statement Data Sales $22,000,000 Cost of goods sold 11,000,000 Gross profit 11,000,000 Operating expenses 5,500,000 EBIT 5,500,000 Interest expense 660,000 EBT 4,840,000 Taxes 1,694,000 Net income $3,145,000 Net fixed assets Total assets If I remember correctly, the DuPont equation breaks down our ROE into three component ratios: the the total asset turnover ratio, and the And, according to my understanding of the DuPont equation and its calculation of ROE, the three ration provide insights into the company's effectiveness in using the company's assets, and MacBook Air DOD > FB * # 3 2 % 5 4 & 7 6 8 9 Q W F R. T IF I remember correctly, the DuPont equation breaks down our ROE into three component ratios: the , the total asset turnover 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. I'm going to check the box to the side of your calcuated value if your calou ation is correct and leave it unchecked if your calculation is incorrect. Cepeus Manufacturing Inc. DuPont Analysis Check if Correct Ratios Asset management ratit Total asset turnover Check if Correct Value Value 50.00 1.67 Ratios Profitability ratios Gross profit margin (%) Operating profit margin (%) Net profit margin (%) Return on equity (%) 22.00 0 000 23.83 "Financing ratios Equity mutiplier 72.43 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: Cepeus Manufacturing Inc. DuPont Analysis Ratios Calculation Value MacBook Air SC 20 F2 14 FS # 3 $ 4 % 5 & 7 2 6 9 8 Q W E R. T Y U S 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: Cepeus Manufacturing Inc. DuPont Analysis Ratios Calculation Value Profitability ratios Numerator Denominator Gross profit margin (%) / Operating profit margin (%) Net profit margin (%) Return on equity (%) Asset management ratio Total asset turnover Financing ratios 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 Copeus'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.) Increase the interest rate on its notes payable or long-term debt obligations because it will reduce the company's net profit margin. Increase the efficiency of its assets so that it generates more sales with each dollar of asset investment and Increases the company's total asset turnover. Use more debt financing in its capital structure and increase the equity multiplier Increase the cost and amount of assets necessary to generate each dollar of sales because it will increase the company's total asset turnover MacBook Air