show work with no excel please!! thank you :) 7. Extra +2] (In case we have cove
ID: 2802239 • Letter: S
Question
show work with no excel please!! thank you :)
7. Extra +2] (In case we have covered financial ratios) GW Inc has the following balance sheet and ncome statement: The new CFO thinks that inventories are excessive and could be lowered sufficiently to cause the current ratio to equal the industry average, 2.75, 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? S 42.000 14,000 Accounts payable 70,000 Other current liah Inventories Total Cl. Long-term debt 80.000 Total CA 5364.000 Net fised assets 26,000 Common equity 280,000 Total liab and equity S490.000 $280,000 S 21,000 Total assets Net inco (A) 11.85%Explanation / Answer
Present ROE = 21000 / 280000 = 7.5%
CA / CL = 2.75
CA = 70000*2.75 = 192500
Inventory = 192500 - (14000 + 70000) = 108500
Inventory to be sold = 280000 - 108500 = 171500
New equity = 280000 - 171500 = 108500
ROE = 21000 / 108500 = 19.35%
ROE difference = 19.35% - 7.5% = 11.85%
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