Return on Equity Subway Inc. sales of $750,000 net income of $82,500 The followi

Question

Return on Equity

Subway Inc.

sales of $750,000
net income of $82,500

The following balance sheet:

Cash.$132,300.Accounts payable..$193,200
Receivables..390,600 .Other current liabilities130,200
Inventories.966,000 Long-term debt296,100
Net Fixed assets..611,100 Common equity1,480,500
Total Assets.$2,100,000 .. Total liabilities and equity..$2,100,000

The new owner thinks that inventories are excessive and can be lowered to the point where the current ratio is equal to the industry average, 2.25x, without affecting sales or net income.
If inventories are sold and not replaced (thus reducing the current ratio to 2.25x), if the funds generated are used to reduce common equity (stock can be repurchased at book value), and if no other changes occur, by how much will the ROE change? Round your answer to two decimal places.

________ %

Explanation / Answer

total current assets = 132300 +390600+966000 = 1488900 current liabilities = 193200+130200= 323400 current ratio = current assets/current liabilites = 4.6 this is to be reduced to 2.25 total current assets at 2.25 current ratio = 2.25(323400) =727650 so inventories = 727650 -132300-390600 = 204750 so worth of inventories sold = 761250 return on equity = net income/shareholders equity at 4.6 current ratio , ROE = 82500/1480500 = 0.0557 = 5.57% at 2.25 ratio amount of equity bought = 761250 so remaining shareholders equity = 1480500-761250 = 719250 ROE = 82500/719250 = 11.47% change in ROE = 11.47-5.57 = 5.9%

Related Questions

Navigate

• Browse (All)
• Browse R
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.