Walking down the hall of your office building with a sheaf of papers in her hand, your friend and colleague, Chloe, stepped into your office and asked the following. Chloe 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? Chloe 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. Eric, 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 Eric 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 Accounts payable Accruals Accounts receivable $600,000 1,200,000 1,800,000 3,600,000 Inventory Notes payable Current liabilities Current assets $720,000 240,000 960,000 1,920,000 2,760,000 4,680,000 630,000 1,890,000 2,520,000 $7,200,000 Income Statement Data Sale: $12,000,000 Cost of goods sold 6,000,000 Gross profit 6,000,000 Operating expenses 3,000,000 EBIT 3,000,000 Interest expense 446,400 EBT 2,553,600 Taxes 893,760 Net income $1,659,840 Long-term debt Total liabilities Common stock Net fixed assets 3,600,000 Retained earnings Total equity Total debt and equity Total assets $7,200,000 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. Canis Major Veterinary Supplies Inc. DuPont Analysis Check if Check if Correct Ratios Value Ratios Value Correct Asset management ratio Total asset turnover 50.00 1.67 Profitability ratios Gross profit margin (%) Operating profit margin (%) Net profit margin (%) Return on equity (%) 21.28 23.05 Financing ratios Equity multiplier 59.28 1.54 Chloe 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: Value / = Canis Major Veterinary Supplies Inc. DuPont Analysis Ratios Calculation Profitability ratios Numerator Denominator Gross profit margin (%) Operating profit margin (%) Net profit margin (%) Return on equity (%) Asset management ratio Total asset turnover Financing ratios Equity multiplier = Chloe I see what I did wrong in my computations. Thanks for reviewing these calculations with me. You saved me from a lot of embarrassment! Eric 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 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. Use more equity financing in its capital structure, which will increase the equity multiplier. Use more debt financing in its capital structure and increase the equity multiplier. 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. Chloe 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