Question: I am stuck on this question, and your help will be very much appreciated. 9. An analysis of company performance using DuPont analysis Walking down




I am stuck on this question, and your help will be very much appreciated.
9. An analysis of company performance using DuPont analysis 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 Income Statement Data Cash $500,000 Accounts payable $600,000 Sales $10,000,000 Accounts receivable 1,000,000 Accruals 200,000 Cost of goods sold 6,000,000 Inventory 1,500,000 Notes payable 800,000 Gross profit 4,000,000 Current assets 3,000,000 Current liabilities 1,600,000 Operating expenses 2,500,000 Long-term debt 1,700,000 EBIT 1,500,000 Total liabilities 3,300,000 Interest expense 300,000 Common stock 675,000 EBT 1,200,000 Net fixed assets 3,000,000 Retained earnings 2,025,000 Taxes 420,000 Total equity 2,700,000 Net income $780,000 Total assets $6,000,000 Total debt and equity $6,000,000 If I remember correctly, the DuPont equation breaks down our return on equity (ROE) into three component ratios: the the 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. In the following table, select whether each of the ratios is correct or incorrect. Hydra Cosmetics Inc.DuPont Analysis Ratios Value Correct/Incorrect Ratios Value Correct/Incorrect Profitability ratios Asset management ratio Gross profit margin (%) 40.00 Total assets turnover 1.67 Operating profit margin (%) 12.00 Net profit margin (%) 13.00 Financial ratios Return on equity (%) 39.51 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 for this part. Hydra Cosmetics Inc.DuPont Analysis Ratios Profitability Ratios Numerator Calculation Denominator Value Gross profit margin (%) Operating profit margin (%) Net profit margin (%) / Return on equity (%) / Asset management ratio Numerator Calculation Denominator Value Total assets turnover Financial ratios Numerator Calculation Denominator Value 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 her showed 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. Decrease the amount of debt financing used by the company, which will decrease the total assets 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. Decrease the company's use of debt capital because it will decrease the equity multiplier. Increase the firm's bottom-line profitability for the same volume of sales, which will increase 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
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