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 general 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 if 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. Balance Sheet Data Income Statement Data Cash $700,000 Accounts payable $840,000 $14,000,000 7,000,000 Accounts receivable 1,400,000 Accruals Sales Cost of goods sold Gross profit 280,000 Inventory 2,100,000 Notes payable 1,120,000 $7,000,000 Current assets $4,200,000 Current liabilities $2,240,000 Operating expenses 3,500,000 Long-term debt 3,640,000 EBIT $3,500,000 Total liabilities $5,880,000 Interest expense 571,200 Common stock 980,000 EBT $2,928,800 Net fixed assets 5,600,000 Retained earnings 2,940,000 Taxes 1,025,080 Total equity $3.920,000 Net income $1,903,720 Total assets $9,800,000 Total debt and equity $9,800,000 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. In the dropdown lists next to your values I'm going to select correct if your calculation is correct and incorrect if your calculation is incorrect. Hydra Cosmetics Inc. DuPont Analysis Ratios Value Correct/Incorrect Ratios Value Correct/Incorrect Profitability ratios Asset management ratio Total asset turnover 1.43 Gross profit margin (%) Operating profit margin (%) 50.00 20.92 19.43 46.35 Net profit margin (%) Financial ratios Return on equity (%) 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 ralio and its value: Note: Do not round intermediate calculations. Round final answers to the nearest whole number. Hydra Cosmetics Inc. DuPont Analysis 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 LANDON: I see what I did wrong in my computations. Thanks for reviewing these calculations with me. You saved me from a lot of embarrassment! Amelia would have been very disappointed in me if I had showed her 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. 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. O Increase the firm's bottom-line profitability for the same volume of sales, which will increase the company's net profit margin. O Decrease the company's use of debt capital because it will decrease the equity multiplier. 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