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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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