You are asked to perform financial ratio analysis, including the use of Du Pont

equation, to analyze the underlying cause for recent deteriorating performance of

East Inc. Based on the information provided below, answer the questions.

Income Statement (in $ million)

Net sales 800

Cost of Goods Sold 696

Operating Expenses (including income taxes) 80

Net Income 24

Balance Sheet

Cash and Marketable Securities 45 Account Payable 50

Account Receivable 90 Short-term Debt 60

Inventory 160 Accrued Expenses 20

Long-lived Assets 150 Long-term Debt 25

Stockholder's Equity 290

Total Assets 445 Liabilities and Equity 445

Definition of Financial Ratios Industry Average

Current Ratio (current asset/current liability) 2

Fixed Assets Turnover Ratio (sales/fixed asset) 6

Total Assets Turnover ratio (sales/total asset) 3

Debt Ratio (total debt/total asset) 30%

Equity Multiplier (total asset/stockholder's equity) 1.43

Inventory Turnover Ratio (sales/inventory) 10

Average Collection Period (account receivables365/sales) 24 days

Profit Margin on Sales (net income/sales) 3%

Return on Total Assets (net income/total assets) 9%

Return on Common Equity (ROE : net income/common equity) 12.9%

(1) Calculate the financial ratios to be compared against the industry average.

(2) Compute the Du Pont Equation for both East Inc. and for the industry as a whole.

ROE = Profit Margin Total Assets Turnover Ratio Equity Multiplier

Equity Multiplier = Total Assets/Common Equity

(3) Analyze the reasons for low ROE of East Inc. based on the comparison of Du Pont

Equation and make recommendations to improve ROE for East Inc.