Reference no: EM13356404

Calculation of Ratio Analysis.

Your company had the following balance sheet and income statement information for 2003:

Balance Sheet
Cash	$20
A/R	1,000
Inventories	5,000
Total C.A.	$6,020	Debt	4,000
Net F.A.	2,980	Equity	5,000
Total Assets	$9,000	Total Claims	$9,000

 

Income Statement
Sales	$10,000
Cost of Goods Sold	$9,200
EBIT	$800
Interest (10%)	$400
EBT	$400
Taxes (40%)	$160
Net Income	$240

The industry average inventory turnover is 5. You think you can change your inventory control system so as to cause your turnover to equal the industry average, and this change is expected to have no effect on either sales or cost of goods sold. The cash generated from reducing inventories will be used to buy tax-exempt securities which have a? percent rate of return. What will your profit margin be after the change in inventories reflected in the income statement?
a. 2.1%
b. 2.4%
c. 4.5%
d. 5.3%
e. 6.7%