MADISON: OK, it looks like t've got a couple of incorrect values, so show me your calculations, and then we can talk strategles 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: Note: Do not round intermediate calculations for this part. MADISON: I see what 1 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 1 had him showed 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 Dufont equation, which of the following strategles should improve the company's ROE? Check alf that apply. Decrease the amount of debt financing used by the company, which wil decrease the total assets tumover ratio. Use more debt financing in as capital structure and increase the equity multiplier. Increase the firm's bottom-line profitability for the same volume of sales, which will increase the companyrinet profit margin, Reduce the companys operating expenses, ats cost of goods sold, and/or the interest rate on its berrowed funds because this wit 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: 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 companys use of debt versus equity financing >. 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. Walking down the hall of your office building with a sheaf of papers in her hand, your friend and colleague, Madison, stepped into your office and asked the following. 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: Ive 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, of ROE, in particular. Xaviec, my new team leader, suggested that t start by using a Dupont analysis, and t'd like to run my numbers and condusions by you, to see if t've missed anything. Here are the balance sheet and income statement data that Xavier gave me, and here are my notes with my cifculations. 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 1 know about the DuPont analysis
