Question 211 pts

Garamond Corporation reported the following income statement and balance sheet for the previous year:

Balance Sheet
Cash	P 100,000
Inventories	1,000,000
Accounts receivable	500,000
Current assets	P1,600,000
			Total debt	P4,000,000
Net fixed assets	4,400,000		Total equity	2,000,000
Total assets	P6,000,000		Total claims	P6,000,000

Income Statement
Sales	P3,000,000
Operating costs	1,600,000
Operating income (EBIT)	P1,400,000
Interest	400,000
Taxable income (EBT)	P1,000,000
Taxes (40%)	400,000
Net income	P 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. The CFO asks what the companys ROE would have been last year if the following had occurred:

• The company maintained the sale sales, but was able to reduce inventories enough to achieve the industry average inventory turnover ratio.
• The cash that was generated from the reduction in inventories was used to reduce part of the companys outstanding debt. So, the companys total debt would have been P4 million less the freed-up cash from the improvement in inventory policy. The companys interest expense would have been 10% of new total debt.
• Assume equity does not change. (The company pays all net income as dividends.)

What would have been the companys ROE last year?

Group of answer choices

31.5%

30.3%

27.0%

29.5%