Question
Baker Inc has the following balance sheet and income statement data: The new CFO thinks that inventories are excessive and could be lowered sufficiently to
Baker Inc has the following balance sheet and income statement data:
The new CFO thinks that inventories are excessive and could be lowered sufficiently to cause the current ratio to equal the industry average, 2.15, 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? Do not round your intermediate calculations.
PLEASE SHOW FORMULAS AND WORK.
Cash Receivables Inventories Total CA Net fixed assets Total assets Sales Net income $14,000 70,000 280,000 $364,000 126,000 $490,000 $280,000 21,000 Accounts payable Other current liabilities Total CL Long-term debt Common equity Total liab. and equity $42,000 28,000 $70,000 140,000 280,000 $490,000 OStep by Step Solution
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