Muscarellal 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, 2.70 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? a. 4.28% b. 4.50% c. 4.73% d. 4.96% e. 5.21% Cash 14,000 Accounts payable $42,000 Receivables 70,000 Other current liabilities 28,000 Inventories 210,000 Total CL 70,000 Total CA $ 294,000 Long-Term debt 70,000 Net fixed assets 126,000 Total assets 420,000 Sales 280,000 Net Income 21,000

Common equity 280,000 Total liab. and equity $420,000

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