ngram Inc has the following balance sheet: Cash Receivables Inventories Net fixed assets Total assets $10,000 Accounts payable 50,000 Other current liabilities 150,000 Long-term debt 90,000 Common equity $300,000 Total liabilities & equity $30,000 20,000 50,000 200,000 $300,000 Last year the firm had $15,000 of net income on $200,000 of sales. However, the new CFO thinks that inventories are excessive and could be lowered sufficiently to cause the current ratio is equal to the industry average, 2.5, without affecting either sales or net income. Assume inventories are sold off and not replaced to get the current ratio to 2.5, and the funds generated are used to buy back common stock at book value without changing anything else. By how much will the ROE change?
Ingram Inc has the following balance sheet:
Cash Receivables Inventories
Net fixed assets Total assets
$10,000 Accounts payable 50,000 Other current liabilities 150,000 Long-term debt 90,000 Common equity $300,000 Total liabilities & equity
$30,000 20,000 50,000 200,000 $300,000
Last year the firm had $15,000 of net income on $200,000 of sales. However, the new CFO thinks that inventories are excessive and could be lowered sufficiently to cause the
Return on equity (ROE) refers to the form which measures the profitability of a business in relation to the equity. As shareholders' equity is equal to a company's assets minus its debt, then return on equity is considered the return on its net assets.
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