A firm has been experiencing low profitability in recent years.Perform an analysis of the firm's financial position using theDuPont equation. The firm has no lease payments but has a $3million sinking fund payment on its debt. The most recent industryaverage ratios and the firm's financial statements are asfollows:

Industry Average Ratios
Current ratio	3	×		Fixed assets turnover	6	×
Debt-to-capital ratio	17	%		Total assets turnover	3	×
Times interest earned	6	×		Profit margin	2.25	%
EBITDA coverage	6	×		Return on total assets	6.75	%
Inventory turnover	11	×		Return on common equity	13.30	%
Days sales outstandinga	24	days		Return on invested capital	13.20	%
aCalculation is based on a 365-dayyear.

Balance Sheet as of December 31, 2019(Millions of Dollars)
Cash and equivalents	$	72		Accounts payable	$	34
Accounts receivables		64		Other current liabilities		13
Inventories		145		Notes payable		34
   Total current assets	$	281		   Total current liabilities	$	81
				Long-term debt		30
				   Total liabilities	$	111
Gross fixed assets		196		Common stock		106
    Less depreciation		52		Retained earnings		208
Net fixed assets	$	144		   Total stockholders' equity	$	314
Total assets	$	425		Total liabilities and equity	$	425

Income Statement for Year Ended December31, 2019 (Millions of Dollars)
Net sales	$	765.00
Cost of goods sold		660.00
  Gross profit	$	105.00
Selling expenses		59.50
EBITDA	$	45.50
Depreciation expense		10.00
  Earnings before interest and taxes (EBIT)	$	35.50
Interest expense		3.50
  Earnings before taxes (EBT)	$	32.00
Taxes (25%)		8.00
Net income	$	24.00

1. Calculate the following ratios. Do not round intermediatecalculations. Round your answers to two decimal places.

   	Firm	Industry Average
   Current ratio	×	3	×
   Debt to total capital	  %	17	%
   Times interest earned	×	6	×
   EBITDA coverage	×	6	×
   Inventory turnover	×	11	×
   Days sales outstanding	days	24	days
   Fixed assets turnover	×	6	×
   Total assets turnover	×	3	×
   Profit margin	  %	2.25	%
   Return on total assets	  %	6.75	%
   Return on common equity	  %	13.30	%
   Return on invested capital	  %	13.20	%

2. Construct a DuPont equation for the firm and the industry. Donot round intermediate calculations. Round your answers to twodecimal places.

   	Firm	Industry
   Profit margin	  %	2.25%
   Total assets turnover	×	3×
   Equity multiplier	×	×

3. Do the balance sheet accounts or the income statement figuresseem to be primarily responsible for the low profits?
   1. Analysis of the extended Du Pont equation and the set of ratiosshows that the turnover ratio of sales to assets is quite low;however, its profit margin compares favorably with the industryaverage. Either sales should be lower given the present level ofassets, or the firm is carrying less assets than it needs tosupport its sales.
   2. Analysis of the extended Du Pont equation and the set of ratiosshows that most of the Asset Management ratios are below theaverages. Either assets should be higher given the present level ofsales, or the firm is carrying less assets than it needs to supportits sales.
   3. The low ROE for the firm is due to the fact that the firm isutilizing more debt than the average firm in the industry and thelow ROA is mainly a result of an excess investment in assets.
   4. The low ROE for the firm is due to the fact that the firm isutilizing less debt than the average firm in the industry and thelow ROA is mainly a result of an lower than average investment inassets.
   5. Analysis of the extended Du Pont equation and the set of ratiosshows that the turnover ratio of sales to assets is quite low;however, its profit margin compares favorably with the industryaverage. Either sales should be higher given the present level ofassets, or the firm is carrying more assets than it needs tosupport its sales.
   -Select-IIIIIIIVVItem 17
4. Which specific accounts seem to be most out of line relative toother firms in the industry?
   1. The accounts which seem to be most out of line include thefollowing ratios: Debt to Total Capital, Inventory Turnover, TotalAsset Turnover, Return on Assets, and Profit Margin.
   2. The accounts which seem to be most out of line include thefollowing ratios: Times Interest Earned, Total Asset Turnover,Profit Margin, Return on Assets, and Return on Equity.
   3. The accounts which seem to be most out of line include thefollowing ratios: Inventory Turnover, Days Sales Outstanding, FixedAsset Turnover, Profit Margin, and Return on Equity.
   4. The accounts which seem to be most out of line include thefollowing ratios: Inventory Turnover, Days Sales Outstanding, TotalAsset Turnover, Return on Assets, and Return on Equity.
   5. The accounts which seem to be most out of line include thefollowing ratios: Current, EBITDA Coverage, Inventory Turnover,Days Sales Outstanding, and Return on Equity.
   -Select-IIIIIIIVVItem 18
5. If the firm had a pronounced seasonal sales pattern or if itgrew rapidly during the year, how might that affect the validity ofyour ratio analysis?
   1. Seasonal sales patterns would most likely affect theprofitability ratios, with little effect on asset managementratios. Rapid growth would not substantially affect youranalysis.
   2. Rapid growth would most likely affect the coverage ratios, withlittle effect on asset management ratios. Seasonal sales patternswould not substantially affect your analysis.
   3. Seasonal sales patterns would most likely affect the liquidityratios, with little effect on asset management ratios. Rapid growthwould not substantially affect your analysis.
   4. If the firm had sharp seasonal sales patterns, or if it grewrapidly during the year, many ratios would most likely bedistorted.
   5. It is more important to adjust the debt ratio than theinventory turnover ratio to account for any seasonalfluctuations.
   -Select-IIIIIIIVVItem 19
   How might you correct for such potential problems?
   1. It is possible to correct for such problems by comparing thecalculated ratios to the ratios of firms in a different line ofbusiness.
   2. It is possible to correct for such problems by comparing thecalculated ratios to the ratios of firms in the same industry groupover an extended period.
   3. There is no need to correct for these potential problems sinceyou are comparing the calculated ratios to the ratios of firms inthe same industry group.
   4. It is possible to correct for such problems by insuring thatall firms in the same industry group are using the same accountingtechniques.
   5. It is possible to correct for such problems by using averagerather than end-of-period financial statement information.