Inventory and its effect on net income

10. LeCompte Inc. has the following balance sheet:

Cash	$ 30,000		Accounts payable	$ 65,000
Receivables	98,000		Other current liabilities	44,000
Inventories	175,000		Long-term debt	187,500
Net fixed assets	300,000		Common equity	306,500
Total assets	$603,000		Total liabilities & equity	$603,000

Last year the firm had $35,000 of net income on $775,000 of sales. However, the new CFO thinks that inventories are excessive and could be lowered sufficiently to cause the current ratio to equal the industry average, 2.1, without affecting either sales or net income. Assume inventories are sold off and not replaced to get the current ratio to 2.1, and the funds generated are used to buy back common stock at book value without changing anything else. What is the ROE after these changes are made? (Note: You may want to refer to the Summary of Ratios worksheet in Module 1 on the courses canvas website.)

a. 11.42%

b. 13.18%

c. 15.06%

d. 16.33%

e. 17.08%