Answer to Question #16947 in Finance for Rebecca

Question

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



Cash $ 14,000 Accounts payable $ 42,000

Receivables 70,000 Other current liabilities 28,000

Inventories 210,000 Total CL $ 70,000

Total CA $294,000 Long-term debt 70,000

Net fixed assets 126,000 Common equity 280,000

Total assets $420,000 Total liab. and equity $420,000

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%
Please show work