Savelots Stores' current financial statements are shown below: A recently released report indicates that Savelots' current ratio of 1.9 is in line with the industry average.However, its accounts payable, which have no interest cost and which are due entirely to purchases of inventories, amount to only 20% of inventory versus an industry average of 60%.Suppose Savelots took actions to increase its accounts payable to inventories ratio to the 60% industry average, but it (1) kept all of its assets at their present levels (that is, the asset side of the statement of financial position remains constant) and (2) also held its current ratio constant at 1.9.Assume that Savelots' tax rate is 40%, that its cost of short-term debt is 10%, and that the change in payments will not affect operations.In addition, ordinary equity would not change.With the changes, what would be Savelots' new ROE?

Question

Savelots Stores' current financial statements are shown below:   A recently released report indicates that Savelots' current ratio of 1.9 is in line with the industry average.However, its accounts payable, which have no interest cost and which are due entirely to purchases of inventories, amount to only 20% of inventory versus an industry average of 60%.Suppose Savelots took actions to increase its accounts payable to inventories ratio to the 60% industry average, but it (1) kept all of its assets at their present levels (that is, the asset side of the statement of financial position remains constant) and (2) also held its current ratio constant at 1.9.Assume that Savelots' tax rate is 40%, that its cost of short-term debt is 10%, and that the change in payments will not affect operations.In addition, ordinary equity would not change.With the changes, what would be Savelots' new ROE?

Quizplus · Accepted Answer

The Answer of Savelots Stores' current financial statements are shown below:   A recently released report indicates that Savelots' current ratio of 1.9 is in line with the industry average.However, its accounts payable, which have no interest cost and which are due entirely to purchases of inventories, amount to only 20% of inventory versus an industry average of 60%.Suppose Savelots took actions to increase its accounts payable to inventories ratio to the 60% industry average, but it (1) kept all of its assets at their present levels (that is, the asset side of the statement of financial position remains constant) and (2) also held its current ratio constant at 1.9.Assume that Savelots' tax rate is 40%, that its cost of short-term debt is 10%, and that the change in payments will not affect operations.In addition, ordinary equity would not change.With the changes, what would be Savelots' new ROE?

Savelots Stores' Current Financial Statements Are Shown Below