Home / Questions / The new CFO thinks that inventories are excessive and could be lowered sufficiently to cau
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?
Sales $280,000
Net income $21,000
Actual current ratio 4.20
Target current ratio 2.70
ORIGINAL BALANCE SHEET
Cash $14,000 Accounts payable $42,000
Receivables $70,000 Other current liabilities $28,000
Inventories $210,000 Long-term debt $70,000
Net fixed assets $126,000 Common equity $280,000
Total assets $420,000 Total liab. and equity $420,000
NI/Equity = ROE: 7.50%
Inv. at target CR $105,000
Reduction in inv & equity $105,000 = inventories and common equity decrease by this amount -(how I can find this number?)
New common equity $175,000
New ROE 12.00%
ROE 4.50%
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