9. Batty Bricks Inc. has the following balance sheet and income statement Amount
ID: 2811234 • Letter: 9
Question
9. Batty Bricks Inc. has the following balance sheet and income statement Amount 24,000 Accounts payable 33,000 Other current liabilities 95,000 Current liabilities Amount Cash Recelvables Inventory Current assets 152,000 Long-term debt Net fixed assets 104,000 Equity Total assets 256,000 Total liabilities & equity 256,000 Sales were $220,000 and net income was $44.000 for the year 32,000 19,000 51,000 120,000 85,000 The CFO thinks that inventories are excessive and could be reduced until the current ratio equals th industry average of 2.1. without affecting sales inventory are used to buy back common stock at book value. or net income. The funds generated by selling off a. What is the new level of current assets with a current ratio of 2.1? b. What should be the new level of inventory? c. How much inventory should be sold ofr? d. What is the new book value of common equity after the buyback? e. What is the new ROE after the stock buyback? f. What's the change in ROE?Explanation / Answer
At this point current asset= 152000
current liabilities = 51000
current ratio = current asset/current liablilities = 152/51= 2.98
new required current ratio = 2.1
for part a ) 2.1 = current asset/ 51000
new current asset = 2.1*51000= 107,100
forr part b) new inventory= new current asset- cash - rec.
= 107100-24000-33000= 50100
for part c) inventory should be sold off= new inventory-old inventory = 95000-50100= 44900
part d) current common equity = 85000
addition = reduction in inventories = 44900
new book value = 44900+85000 = 129,900
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