Your company has the following balance sheet and income statement information:

Cash $ 20

A/R 1,000

Inventories 5,000

Total C.A. $ 6,020 Debt $ 4,000

Net F.A. 2,980 Equity 5,000

Total Assets $ 9,000 Total Claims $ 9,000

Sales $10,000

Cost of goods sold 9,200

EBIT $ 800

Interest (10%) 400

EBT $ 400

Taxes (40%) 160

Net Income $ 240

The industry average inventory turnover is 5. You think you can change your inventory control system so as to cause your turnover to equal the industry average, and this change is expected to have no effect on either sales or cost of goods sold. The cash generated from reducing inventories will be used to buy tax-exempt securities that have a 7 percent rate of return. What will your profit margin be after the change in inventories is reflected in the income statement?

4.5%

2.1%

2.4%

5.3%

6.7%