Muscarella Inc.has the following balance sheet and income statement data:
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?

Question

Muscarella Inc.has the following balance sheet and income statement data: 
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?

Quizplus · Accepted Answer

$\begin{array}{lr}
\text { Sales } & \$ 280,000 \
\text { Net income } & \$ 21,000 \
\text { Actual current ratio } & 4.20 \
\text { Target current ratio } & 2.70
\end{array}$
 11ea42d0_c066_e1de_9abf_2144b634b825_TB2090_00