Walking down the hall of your office building with a sheaf of papers in his hand, your friend and colleague, Akira, stepped into your office and asked the following AKIRA: 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? AKIRA: I've 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, or ROE, in particular. Emma, 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 if I've missed anything. Here are the balance sheet and income statement data that Emma 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 Cash $1,300,000 Accounts payable Accruals $1,560,000 520,000 Accounts receivable Inventory 2,600,000 3,900,000 Income Statement Data Sales $26,000,000 Cost of goods sold 15,600,000 Gross profit $10,400,000 Operating expenses 6,500,000 EBIT $3,900,000 Notes payable Current liabilities 2,080,000 $4,160,000 Current assets $7,800,000 Long-term debt 4,420,000 Interest expense 780,000 Total liabilities Common stock $8,580,000 1,755,000 EBT $3,120,000 Net fixed assets 7,800,000 Retained earnings 5,265,000 Taxes 1,092,000 Total equity $7,020,000 Net income $2,028,000 Total assets $15,600,000 Total debt and equity $15,600,000 the total asset If I remember correctly, the DuPont equation breaks down our ROE into three component ratios: the turnover ratio, and the And, according to my understanding of the DuPont equation and i calculation of ROE, the three ratios provide insights into the con effectiveness in using the company's assets, and management of its liquidity and its tax records/ cotrol management of its sales and share price A over its expenses. use of debt versus equity financing Ind then we lan talk about possible strategies that will improve the ratios. In the dropdown lists next to Your VALUES IT going to CICLE COMTECT your calculation is correct and incorrect if your calculation is incorrect. Ratios Value Correct/Incorrect Canis Major Veterinary Supplies Inc. DuPont Analysis Value Correct/Incorrect Ratios Asset management ratio 40.00 Total asset turnover 1.67 Profitability ratios Gross profit margin (%) Operating profit margin (%) % Net profit margin (%) Return on equity (%) 12.00 Correct 13.00 Financial ratios 39.43 Incorrect Equity multiplier 1.82 AKIRA: 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: Note: Do not round intermediate calculations. Round final answers to the nearest whole number. Canis Major Veterinary Supplies Inc. DuPont Analysis Calculation Value Numerator Denominator / / = / Profitability ratios Gross profit margin (%) Operating profit margin (%) Net profit margin (%) Return on equity (%) Asset management ratio Total asset turnover Financing ratios Equity multiplier / = 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. Decrease the company's use of debt capital because it will decrease the equity multiplier. Decrease the amount of debt financing used by the company, which will decrease the total asset turnover ratio. 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