Question

Muscarella Inc. has the following balance sheet and income statement data: Cash $ 14,000 Accounts payable $ 42,000 Receivables 70,000 Other current 28.000 liabilities Inventories 210.000 TotalCL $70,000 Total CA $294,000 Long-term debt 70,000 Net foed assets 125.000 Common equity 280.000 Total assets $420.000 Total liab. and equity $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, 2.50, 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? Select the correct answer. a. 6.13% b. 6.72% 495% d. 5.54% e. 7.31%

Answer 1

Answer — 5,54% Returo_00_Equitte CROE) Refern on Equity CROE) is the ratio that measures the organisation's rate of return on the equity funds invested in the organisation. It measures the return generated on the shareholder's equiry, It is the ratio of Nel Iacombe divided by the stockholders equity L ii Relvin_on Equily CROf) : Net Inome X100 - Stockholdeo'Equity Myscavelle Inc. Clubente Equity Behyto is onlaylaked as follows: - Given Net Incoge : $ 21000, Stockhollevó Egylly - $2grees carrent Return on - $ 21000 x 100 = 7.50 % - Epvlly (ROE) # 280000 - In the question, we hque to calculate the change in Rebern on Equity from the conditions proulded It is given that company. targets it cynrent 1970 to the 3.50 to thinks bhiali quen toiler are excessive and they should be allsed to the amount as per the targeted Current | Ratio, such realisation of cash will be utiliser to buy back shares This will reduce the stockholder's equity - go we will have to first calculate the unent ration Lot muscarella Inc qt current level. Then, we will have to labiust the value of squentory to get decueqre on stock holder's equity ant finally a few return of equity will be calculated

Cuel fglys ut Current level- conventi Aurti : $29400o = 4.20 Canent liabililyes 70000 Inventory Uplye at the targeted current ratio of z. so it Targeted Inventory = (Curreglº x Coreyli- yhtAccount Ilipilities fytie 2 Receivable · C70000 X 2150) - (14000 + 70000) 2_41000 - 84000 -: $_91000. __ company have sold inventories - $ (219000 - 91000) : $ 119000 Myscayrella will use such cash rellsed from iqventures in byly by ch of shares. Therefore such relycer the stockholder's egylby. :. New stawhole's Egyly = $(280.000 – 19009) : $ 161000, - New Rebyuq_on_Equity : Net Income : $ 21000 = 13.04 - $ 162coo 1000 - change_19_Betyvo 04_Egylby(ROE)_q5 per few current rebo _Change 19 Petyan : New Return og - 01 Reloon on of toulty Eqully egylty : (19.044 - 7.50) % : 5.54 % 1 ... If company sold inventory to teach tzugebed curreal ratio and -.ytilised such byy bých the change in iflynn 09_egully is_5.544% Answer 15.54%