By how much will the roe change from such an inventory sell

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Reference no: EM13275323

AA Electronics, which reports a net income equal to $9200, has the following balance sheet. Current assets $110000, Net fixed assets $40000, total assets $150000, current liabilites $27500, long term debt $32500, common equity $90000, total liabilities and equity $150000. The company's new owner thinks that inventories, which are currently $70000, are excessive and can be lowered to the point where the current ratio is equal to the industry average of 2.0X without affecting either sales or net income. If inventories are sold off and not replaced so as to reduce the current ratio to 2.0X, the funds generated would be used to reduce common equity (stock can be repurchased at book value). If everything else stays the same, including net income, by how much will the ROE change from such an inventory sell off?

Reference no: EM13275323

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