Corporate decision makers and analysts often use a particular technique, called a DuPont analysis, to better understand the factors that drive a company's financial performance, as reflected by its return on equity (ROE). By using the DuPont equation, which disaggregates the ROE into three components, analysts can see why a company's ROE may have changed for better or worse and identify particular company strengths and weaknesses. The DuPont Equation A DuPont analysis is conducted using the DuPont equation, which helps to identify and analyze three important factors that drive a company's ROE. According to the equation, which of the following factors directly affect a company's ROE? Check all that apply. Efficiency in use of total assets Market-to-book-value ratio Financial leverage Balance Sheet Data Income Statement Data Cash $1,000,000 Accounts payable $1,200,000 Sales $20,000,000 Accounts receivable 2,000,000 Accruals 400,000 Cost of goods sold 12,000,000 Inventory 3,000,000 Notes payable 1,600,000 Gross profit 8,000,000 Current assets 6,000,000 Current liabilities 3,200,000 Operating expenses 5,000,000 Long-term debt 4,500,000 EBIT 3,000,000 Total liabilities 7,700,000 Interest expense 732,000 Common stock 1,575,000 EBT 2,268,000 Net fixed assets 8,000,000 Retained earnings 4,725,000 Taxes Total equity Total assets $14,000,000 Total debt and equity 6,300,000 $14,000,000 Net income 567,000 $1,701,000 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 Ratios Profitability ratios Gross profit margin (%) 40.00 Value Correct/Incorrect Ratios Value Correct/Incorrect Asset management ratio. Total assets turnover 1.43 Operating profit margin (%) 11.34 Net profit margin (%) 12.15 Financial ratios Return on equity (%) 31.62 Equity multiplier 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: Do not round intermediate calculations and round your final answers up to two decimals. Hydra Cosmetics Inc. DuPont Analysis Ratios Profitability ratios Gross profit margin (%)) Operating profit margin (%) Net profit margin (%) Return on equity (%) Asset management ratio Calculation Value Numerator Denominator Asset management ratio Total assets turnover Financial 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 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. Increase the cost and amount of assets necessary to generate each dollar of sales because it will increase the company's total assets turnover. Use more debt financing in its capital structure and increase the equity multiplier. Decrease the amount of debt financing used by the company, which will decrease the total assets turnover ratio. Increase the firm's bottom-line profitability for the same volume of sales, which will increase the company's net profit margin