Assignments Quizzes Discussions Grades Attendance My Media L

Assignments Quizzes Discussions Grades Attendance My Media Lynda.com Tuesda Nina Thornhill: Attempt 1 Question 13 (1 point) Jordan Inc has the following balance sheet and income statement data Cash Receivables Inventories Total CA Net fixed assets Total assets Sales $14,000 Accounts payable 70,000 Other current liabilities 280,000 Total CL $364,000 Long-term debt 126,000 Common equity S490,000 Total liab. and equity S280,000 $42,000 $70,000 140,000 280,000 $490,000 Net income 21,000 The new CFO thinks that inventories are excessive and could be lowered sufficiently to cause the current ratio to equa he industry average, 2.25, without affecting either sales or net income. Assuming that inventories are sold off and n eplaced to get the current ratio to the target level, and that the funds generated are used to buy back common stock a ook value, by how much would the ROE change? Do not round your intermediate calculations 16.65% 22.13% ed 021.07% DELL

Solution

First of all lets find out how much inventory is to be sold

Required current ratio = 2.25

2.25 = Current asset/Current liability

2.25 = Current asset / 70,000

Required Current asset = 70000*2.25 = 157500

Current asset to be reduced = 364000-157500 = 206500$

Thus inventory to be sold = 206500$

Shares to be bought back = 206500$

value of shares after buyback = 280000-206500 = 73500$

Now old ROE = Net income/Sales

=21000/280000

=7.5%

New ROE = 21000/73500

=28.57%

Change in ROE = 28.57%-7.5% = 21.07%

Thus ans : 21.07%