By how much would the ROE change

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Question - Muscarella Inc. has the following balance sheet and income statement data: Cash $ 14,000Accounts payable $ 42,000 Receivables 70,000Other current liabilities 28,000 Inventories 210,000 Total CL $ 70,000 Total CA $294,000Long-term debt 70,000 Net fixed assets 126,000Common 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?

Reference no: EM132906369

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