Answer to Question #8524 in Economics of Enterprise for Kimberly

Question #8524
Muscarella Inc. has the following balance sheet and income statement data: Cash $ 14,000 Receivables 70,000 Inventories 210,000 Total CA $294,000 Net fixed assets 126,000 Total assets $420,000 Sales $280,000 Net income $ 21,000 The new CFO thinks that inventories are excessive and could be lowered sufficiently to cause the current ratio to equal the industry average, 2.70, without affecting either sales or net income. Assuming that inventories are sold off and not replaced to get the current ratio to the target level, and that the funds generated are used to buy back common stock at book value, by how much would the ROE change? a. 4.28% b. 4.50% c. 4.73% d. 4.96% e. 5.21%
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