Reference no: EM133012110

Problem 1: It's the last day of the fiscal year of I-Hope-You' re-Not-Too-Desperate Merchandising Co. If management does not take any of the actions listed below today, the firm will end the year with net income of $50,000 and total owners' equity of $500,000. Management would like to take some action today in order to increase the firm's return on equity (net income/total owners' equity) for the year. Considering each of the following actions by itself, what would be the firm's return on equity for the year if the action is taken? (For simplicity, assume that the firm's tax rate is 0%. In other words, ignore the effect of taxes.)

1. Speed up the collection of $10,000 in accounts receivable, so that the money is collected today, rather than during the first week of the new fiscal year.
2. Issue 1,000 additional shares of the firm's stock in the marketplace. The stock would be sold for $10 per share. The firm would receive the cash today from the sale of shares.
3. Sell an additional $20,000 of inventory for a price of $22,000. The cash from the sale would not be collected until the first week of the new year.