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Ratios Profitability ratios Gross profit margin (%) Operating profit margin (%) Net profit margin (%) Return on equity (%) Value Correct/Incorrect 50.00 20.92 26.15 62.45 Correct Ratios Asset management ratio Total assets turnover Financial ratios Equity multiplier Value Correct/Incorrect 1.67 1.43 Correct Incorrect

\begin{tabular}{l|l|l|} Ratios & Calculation & \\ \hline Profitability ratios & Numerator & Denominator \\ Gross profit margin (%) & \\ Operating profit margin (\%) \\ Net profit margin (\%) \\ Return on equity (\%) \\ Asset management ratio \\ Total assets tumover \\ Financial ratios \\ Equity multiplier \end{tabular} 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 Oupont equation and its calculation of ROE, the three ratios provide insights into the comparny's . effectiveness in using the company's assets, and control over its experises Now, let's see your notes with your ratios, and then we can talk about possible strateoies that will improve the ratios. I'm going to check the box to the side of vour calculated value if your calculation is correct and leave it unchecked if vour calculation is incorrect. Canis Major Veterinary Supplies Inc. Dupont Analysis MADISON: 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 1 help? MADISON: I've been reviewing the company's finandial statements and looking for ways to improve our performance, in oeneral, and the company's return on equity, or ROE, in particular. Xavier, my new team leader, suggested that I start by using a DuPont analysis, and r'd like to nun my numbers and conclusions by you to see whether Ive missed anything. Here are the balance sheet and income statement data that Xavier 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. MADISON: I see what 1 did wrong in my computations. Thanics for reviewing these calculations with me. You saved me from a lot. of embarrassment Xavier would have been very disappointed in me if I had showed him my original work. 50, 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 Dufiont equation, which of the following strategies should improve the companys ROE? Check all that apply. Incroase the efficlency of its assets so that it generates more sales with each dollar of asset investment and increases the company's total assets tumover. Reduce the companys operabing expenses, its cost of ooods sold, and/or the interest rate on its borrowed funds because this will increase the company's net profit margin. Decrease the amount of debt financino used by the company, which will decrease the total assets turnover ratio. Increase the firm's bottom-line profitability for the same volume of sales, which will increase the company's net profit margin. \begin{tabular}{llllll} \hline Balance Sheet Data & & & \multicolumn{2}{l}{ Income Statement Data } \\ \hline Cash & $1,300,000 & Accounts payable & $1,560,000 & Sales & $26,000,000 \\ Accounts receivable & 2,600,000 & Accruals & $20,000 & Cost of goods sold & 13,000,000 \\ Inventory & 3,900,000 & Notes payable & 2,080,000 & Gross profit & 13,000,000 \\ Current assets & 7,800,000 & Current liabilities & 4,160,000 & Operating expenses & 6,500,000 \\ & & Long-term debt & 6,760,000 & EBIT & 6,500,000 \\ & & Total liabilities & 10,920,000 & Interest expense & 1,060,800 \\ & & Common stock & 1,170,000 & EBT & 5,439,200 \\ Net fixed assets & 7,800,000 & Retained earnings & 3,510,000 & Taxes & 1,359,800 \\ & & Total equity & 4,680,000 & Net income & $4,079,400 \\ \hline \end{tabular}

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