Madison: 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? Madison: 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. Xavier, 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 Xavier 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 $700,000 Accounts payable 1,400,000 Accruals 2,100,000 Notes payable 4,200,000 Current liabilities Long-term debt Total liabilities Common stock 2,800,000 Retained earnings Total equity $7,000,000 Total debt and equity $840,000 280,000 1,120,000 2,240,000 1,960,000 4,200,000 700,000 2,100,000 2,800,000 $7,000,000 Income Statement Data Sales $14,000,000 Cost of goods sold 7,000,000 Gross profit 7,000,000 Operating expenses 3,500,000 EBIT 3,500,000 Interest expense 369,600 EBT 3,130,400 Taxes 1,095,640 Net income $2,034,760 Net fixed assets Total assets If I remember correctly, the DuPont equation breaks down our return 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 Check if Check if Correct Value Value Ratios Asset management ratio Total asset turnover 2. 000 Ratios Profitability ratios Gross profit margin (%) Operating profit margin (%) Net profit margin (%) Return on equity (%) 50.00 22.36 29.07 97.09 O Financing ratios Equity multiplier 0 1.67 0 Madison: 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: Value Canis Major Veterinary Supplies Inc. DuPont Analysis Ratios Calculation 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 Madison: I see what I did wrong in my computations. Thanks for reviewing these calculations with me. You saved me from a lot of embarrassment! Xavier would have been very disappointed in me if I had himshowed my original work. So, now let's switch topics and identify general strategies that could be used to positively affect Canis Major'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 firm's bottom-line profitability for the same volume of sales, which will increase the company's net profit margin. Use more equity financing in its capital structure, which will 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. Madison: 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? Madison: 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. Xavier, 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 Xavier 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 $700,000 Accounts payable 1,400,000 Accruals 2,100,000 Notes payable 4,200,000 Current liabilities Long-term debt Total liabilities Common stock 2,800,000 Retained earnings Total equity $7,000,000 Total debt and equity $840,000 280,000 1,120,000 2,240,000 1,960,000 4,200,000 700,000 2,100,000 2,800,000 $7,000,000 Income Statement Data Sales $14,000,000 Cost of goods sold 7,000,000 Gross profit 7,000,000 Operating expenses 3,500,000 EBIT 3,500,000 Interest expense 369,600 EBT 3,130,400 Taxes 1,095,640 Net income $2,034,760 Net fixed assets Total assets If I remember correctly, the DuPont equation breaks down our return 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 Check if Check if Correct Value Value Ratios Asset management ratio Total asset turnover 2. 000 Ratios Profitability ratios Gross profit margin (%) Operating profit margin (%) Net profit margin (%) Return on equity (%) 50.00 22.36 29.07 97.09 O Financing ratios Equity multiplier 0 1.67 0 Madison: 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: Value Canis Major Veterinary Supplies Inc. DuPont Analysis Ratios Calculation 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 Madison: I see what I did wrong in my computations. Thanks for reviewing these calculations with me. You saved me from a lot of embarrassment! Xavier would have been very disappointed in me if I had himshowed my original work. So, now let's switch topics and identify general strategies that could be used to positively affect Canis Major'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 firm's bottom-line profitability for the same volume of sales, which will increase the company's net profit margin. Use more equity financing in its capital structure, which will 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