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 retum on equity, or ROE, in particular. Xavier, my new team leader, suggested that 1 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 finoncial statements and to remember what I know about the Dupont analysis. If I remember correctly, the DuPont equation breaks down our ROE into three component ratios: the tumover ratio, and the the total z 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 the side of your calculated value if your calculation is correct and leave it unchecked if your calculation is incorrect. 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 MADISON: I see what I did wrong in my computations. Thanks for reviewing these calculations with me. You saved me from a lot of embarrassmentl 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. MADISON: I see what I did wrong in my computations. Thanks for reviewing these calculations with me. You saved me from a lot of embarrassmenti 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 shouild improve the company's ROE? Check all that apply. Decrease the amount of debt financing used by the company, which will decrease the total assets tumover ratio. Increase the efficiency of its assets so that it generates more sales with each dollar of asset investment and increases the company's total assets turnover. Decrease the company's use of debt capital because it will decrease the equity multiplier. Use more debt financing in its capital structure and increase the equity multiplier. 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
