Inventory and its effect on net income

1.Nachman Inc. has the following balance sheet:

Cash

$18,750

Accounts payable

$62,500

Receivables

106,250

Other current liabilities

56,250

Inventories

325,000

Long-term debt

193,750

Net fixed assets

300,000

Common equity

437,500

Total assets

$750,000

Total liabilities & equity

$750,000

Last year the firm had $40,000 of net income on $600,000 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, 2.5, without affecting either sales or net income.Assume inventories are sold off and not replaced to get the current ratio to 2.5, 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?

a.9.14%

b.11.60%

c.14.07%

d.15.33%

e.16.25%