Walking down the hall of your office building with a sheaf of papers in his hand, your friend and colleague, Landon, stepped into your office and asked the following LANDON: 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? LANDON: 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. Amelio, 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 Amelia 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 Income Statement Data Sales $14,000,000 7,000,000 Accounts receivable Inventory $810,000 280,000 1,120,000 $2,240,000 3,640,000 $7,000,000 Balance Sheet Data $700,000 Accounts payable 1,400,000 Accruals 2,100,000 Notes payable $4,200,000 Current liabilities Long-term debt Total liabilities Common stock 5,600,000 Retained earnings Total equity $9,800,000 Total debt and equity Cost of goods sold Gross profit Operating expenses EBIT Current assets 3,500,000 $3,500,000 571,200 Interest expense $5,880,000 980,000 EBT $2,928,800 Net fixed assets Taxes 2,940,000 $3,920,000 $9,800,000 1,025,080 $1,903,720 Net income Total assets If I remember correctly, the DuPont equation breaks down our ROE into three component ratios: the tumover ratio, and the equity multiplier net profit margin the total asset And, according to my understanding of the DuPont equation and its calculation of ROE, the three ratios provide insights into the company's shareholder and dividend management 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. In the dropdown lists next to your values I'm going to select correct if your calculation is correct and incorrect if your calculation is incorrect. Hydra Cosmetics Inc. DuPont Analysis Correct/Incorrect Ratios Ratios Value Value Correct/Incorrect Value Value Correct/Incorrect Hydra Cosmetics Inc. DuPont Analysis Correct/Incorrect Ratios Asset management ratio Correct Total asset turnover 1.43 Correct Ratios Profitability ratios Gross profit margin (%) Operating profit margin (9) Net profit margin (%) Return on equity (%) 50.00 20.92 Incorrect 19.43 Incorrect Incorrect Financial ratios Equity multiplier 46.35 1.67 Incorrect LANDON: 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 values Note: Do not round intermediate calculations. Round final answers to the nearest whole number Hydra Cosmetics Inc. DuPont Analysis Calculation Numerator Denominator Value Profitability ratios Gross profit margin (%) Operating profit margin (%) Net profit margin (%) Return on equity (95) Asset management ratio Total asset turnover Financing ratios Equity multiplier LANDON: I see what I did wrong in my computations. Thanks for reviewing these calculations with me. You saved me from a lot of embarrassmenti Amelia 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 Hydra'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 cost and amount of assets necessary to generate each dollar of sales because it will increase the company's total asset turnover Decrease the amount of debt financing used by the company, which will decrease the total asset turnover ratio. 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. Use more equity financing in its capital structure, which will increase the equity multiplier