question one: (net profit margin / gross profit margin) question two: (equity multiplier / equity ratio) question three: (management of its sales and share price / use of debt versus equity financing) question four: (control over its expenses / management of its revenues and depreciation methods)

9. An analysis of company performance using DuPont analysis Aa Aa E A sheaf of papers in his hand, your friend and colleague, Jason, steps into your office and asked the following. Jason 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? Jason 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. Anja, 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 Anja 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 $1,000,000 Accounts payable 2,000,000 Accruals 3,000,000 Notes payable 6,000,000 Current liabilities Long-term debt Total liabilities Common stock 4,000,000 Retained eamings Total equity $10,000,000 Total debt and equity $1,200,000 400,000 1,600,000 3,200,000 2,300,000 5,500,000 1,125,000 3,375,000 4,500,000 $10,000,000 Income Statement Data Sales $20,000,000 Cost of goods sold 10,000,000 Gross profit 10,000,000 Operating expenses 5,000,000 EBIT 5,000,000 Interest expense 468,000 EBT 4,532,000 Taxes 1,586,200 Net income $2,945,800 Net fixed assets Total assets 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. I'm going to check the box to the side of your calculated value if your calculation is correct and leave it unchecked if your calculation is incorrect. Check if Correct Ratios Value Value Pavo Media Systems Inc. DuPont Analysis Check if Correct Ratios Asset management ratio Total asset turnover O O Financing ratios Equity multiplier Profitability ratios Gross profit margin (%) Operating profit margin (%) Net profit margin (%) Return on equity (%) 2. 000 50.00 22.66 29.46 107.23 1. 820 Jason 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: Pavo Media Systems Inc. DuPont Analysis Calculation Numerator Denominator Value Ratios Profitability ratios Gross profit margin (%) Operating profit margin (%) Net profit margin (%) Retum on equity (%) Asset management ratio Total asset turnover Financing ratios Equity multiplier Jason I see what I did wrong in my computations. Thanks for reviewing these calculations with me. You saved me from a lot of embarrassment! Anja 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 Pavo'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 efficiency of its assets so that it generates more sales with each dollar of asset investment and increases the company's total asset turnover. 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. 9. An analysis of company performance using DuPont analysis Aa Aa E A sheaf of papers in his hand, your friend and colleague, Jason, steps into your office and asked the following. Jason 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? Jason 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. Anja, 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 Anja 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 $1,000,000 Accounts payable 2,000,000 Accruals 3,000,000 Notes payable 6,000,000 Current liabilities Long-term debt Total liabilities Common stock 4,000,000 Retained eamings Total equity $10,000,000 Total debt and equity $1,200,000 400,000 1,600,000 3,200,000 2,300,000 5,500,000 1,125,000 3,375,000 4,500,000 $10,000,000 Income Statement Data Sales $20,000,000 Cost of goods sold 10,000,000 Gross profit 10,000,000 Operating expenses 5,000,000 EBIT 5,000,000 Interest expense 468,000 EBT 4,532,000 Taxes 1,586,200 Net income $2,945,800 Net fixed assets Total assets 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. I'm going to check the box to the side of your calculated value if your calculation is correct and leave it unchecked if your calculation is incorrect. Check if Correct Ratios Value Value Pavo Media Systems Inc. DuPont Analysis Check if Correct Ratios Asset management ratio Total asset turnover O O Financing ratios Equity multiplier Profitability ratios Gross profit margin (%) Operating profit margin (%) Net profit margin (%) Return on equity (%) 2. 000 50.00 22.66 29.46 107.23 1. 820 Jason 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: Pavo Media Systems Inc. DuPont Analysis Calculation Numerator Denominator Value Ratios Profitability ratios Gross profit margin (%) Operating profit margin (%) Net profit margin (%) Retum on equity (%) Asset management ratio Total asset turnover Financing ratios Equity multiplier Jason I see what I did wrong in my computations. Thanks for reviewing these calculations with me. You saved me from a lot of embarrassment! Anja 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 Pavo'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 efficiency of its assets so that it generates more sales with each dollar of asset investment and increases the company's total asset turnover. 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