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 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 whether 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. Balance Sheet Data Income Statement Data Sales Cash $1,300,000 Accounts payable Accruals Accounts receivable 2,600,000 $1,560,000 520,000 2,080,000 Cost of goods sold Inventory 3,900,000 Notes payable Gross profit Current assets 7,800,000 Current liabilities Operating expenses 4,160,000 ,760,000 Long-term debt EBIT Total liabilities 10,920,000 Interest expense Common stock 1,170,000 EBT Net fixed assets 7,800,000 Retained earnings 3,510,000 Taxes Total equity 4,680,000 Net Income Total assets $15,600,000 Total debt and equity $15,600,000 $26,000,000 13,000,000 13,000,000 6,500,000 6,500,000 1,060,800 5,439,200 1,359,800 $4,079,400 Ratios Value Correct/Incorrect Profitability ratios Gross profit margin (%) 50.00 Operating profit margin (%) 20.92 Net profit margin (%) 26.15 Return on equity (%). 62.45 444 Ratios Asset management ratio Total assets turnover Financial ratios Equity multiplier Value Correct/Incorrect 1.67 1.43 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: Do not round intermediate calculations and round your final answers up to two decimals. Canis Major Veterinary Supplies Inc. DuPont Analysis Ratios Calculation Value Numerator Profitability ratios Denominator Gross profit margin (%) Operating profit margin (%) Net profit margin (%) Return on equity (%) Asset management ratio Total assets turnover Financial ratios Equity multiplier 13,000,000 1 6,500,000 1 4,079,400 7 / 26,000,000 26,000,000 26,000,000 50.00 25.00 15.69 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 showed him 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. Decrease the amount of debt financing used by the company, which will decrease the total assets turnover ratio. Decrease the company's use of debt capital because it will decrease 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. MADISON: 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