FINANCE: Please show all work for the two multiple choice questions.

1). Georgia Electric reported the following income statement and balance sheet for the previous year:

Balance Sheet:

Cash $ 100,000

Inventories 1,000,000

Accounts receivable 500,000

Current assets $1,600,000

Total debt $4,000,000

Net fixed assets 4,400,000

Total equity 2,000,000

Total assets $6,000,000

Total claims $6,000,000

Income Statement:

Sales $3,000,000

Operating costs 1,600,000

Operating income (EBIT) $1,400,000

Interest 400,000

Taxable income (EBT) $1,000,000

Taxes (40%) 400,000

Net income $ 600,000

The companys interest cost is 10%, so the companys interest expense each year is 10% of its total debt. While the companys financial performance is quite strong, its CFO is always looking for ways to improve. The CFO has noticed that the companys inventory turnover ratio is considerably weaker than the industry average, which is 6.0. As an exercise, the CFO asks what would the companys ROE have been last year if the following had occurred: The company maintained the same sales, but reduced inventories enough to achieve the industry average inventory turnover ratio. Cash generated from the inventory reduction was used to reduce the companys outstanding debt. So, the companys total debt would have been $4 million less the freed-up cash from the improvement in inventory policy. (Assume equity does not change and all earnings are paid out as dividends.)

Under this scenario, what would have been the companys ROE last year? Explain your answer.

a. 27.0%

b. 29.5%

c. 30.3%

d. 31.5%

e. 33.0%

2). Below are the 2004 and 2005 year-end balance sheets for Kewell Boomerangs:

2005 2004

Cash $ 100,000 $ 85,000

Accounts receivable 432,000 350,000

Inventories 1,000,000 700,000

Total current assets $1,532,000 $1,135,000

Net fixed assets 3,000,000 2,800,000

Total assets $4,532,000 $3,935,000

Accounts payable $ 700,000 $ 545,000

Notes payable 800,000 900,000

Total current liabilities $1,500,000 $1,445,000

Long-term debt 1,200,000 1,200,000

Common stock 1,500,000 1,000,000

Retained earnings 332,000 290,000

Total common equity $1,832,000 $1,290,000

Total liabilities and equity $4,532,000 $3,935,000

Kewell Boomerangs has never paid a dividend on its common stock. Kewell issued $1,200,000 of long-term debt in 1997. This debt was non-callable and is scheduled to mature in 2027. As of the end of 2005, none of the principal on this debt has been repaid. Assume that 2004 and 2005 sales were the same in both years.

Which of the following statements is most correct? Explain your answer.

a. Kewells current ratio in 2005 was higher than it was in 2004.

b. Kewells inventory turnover ratio in 2005 was higher than it was in 2004.

c. Kewells debt ratio in 2005 was higher than it was in 2004.

d. Since retained earnings increased, the company must have paid no dividends.

e. Because fixed assets turnover increased slower than total assets, the total assets turnover is greater than the fixed assets turnover.