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By how much will the return on equity change

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Problem -Earth's Best Company has sales of $200,000, a net income of $15,000, and the following balance sheet:

Cash$ 10,000                      Accounts payable$ 30,000

Receivables50,000           Other current liabilities20,000

Inventories150,000          Long-term debt 50,000

Net fixed assets 90,000  Common equity200,000

Total assets$300,000      Total liabilities and equity$300,000

The company's new owner thinks that inventories are excessive and can be lowered to the point where the current ratio is equal to the industry average, 2.5x, without affecting either sales or net income. If inventories are sold off and not replaced so as to reduce the current ratio to 2.5x, if the funds generated are used to reduce common equity (stock can be repurchased at book value), and if no other changes occur, by how much will the return on equity (ROE) change?

Reference no: EM131640725

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