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Balance Sheet Data Cash $1,300,000 Income Statement Data Sales $26,000,000 $1,560,000 Accounts payable Accruals 2,600,000 520,000 Accounts receivable Inventory Cost of 15,600,000 goods sold Gross profit 10,400,000 2,080,000 Current assets 4,160,000 6,500,000 Operating expenses EBIT 4,420,000 3,900,000 8,580,000 780,000 3,900,000 Notes payable 7,800,000 Current liabilities Long-term debt Total liabilities Common stock 7,800,000 Retained earnings Total equity $15,600,000 Total debt and equity Interest expense EBT 1,755,000 3,120,000 5,265,000 Taxes 780,000 Net fixed assets Net income $2,340,000 7,020,000 $15,600,000 Total assets If I remember correctly, the DuPont equation breaks down our ROE into three component ratios: the net profit margin the total asset turnover ratio, and the equity multiplier And, according to my understanding of the DuPont equation and its calculation of ROE, the three ratios provide insights into the company's use of debt versus equity financing effectiveness in using the company's assets, and control over its expenses 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. Canis Major Veterinary Supplies Inc. DuPont Analysis Value Correct/Incorrect Ratios Value Correct/Incorrect Ratios Profitability ratios Asset management ratio Total assets turnover Correct 1.67 Correct Incorrect Gross profit 40.00 margin (%) Operating profit 12.00 margin (%) Net profit margin 15.00 (%) Return on equity 45.59 (%) Incorrect Financial ratios Equity multiplier Incorrect 1.82 Incorrect Do not round intermediate calculations and round your final answers up to two decimals. Canis Major Veterinary Supplies Inc. DuPont Analysis Value Calculation Numerator Denominator Ratios Profitability ratios Gross profit margin (%) Operating profit margin (%) Net profit margin (%) Return on equity (%) Asset management ratio Total assets turnover Financial ratios Equity multiplier / / 1 AKIRA: I see what I did wrong in my computations. Thanks for reviewing these calculations with me. You saved me from a lot of embarrassment! Emma 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 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 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 amount of debt financing used by the company, which will decrease the total assets turnover ratio. Use more debt financing in its capital structure and increase the equity multiplier. Increase the interest rate on its notes payable or long-term debt obligations because it will reduce the company's net profit margin. AKIRA: 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
