FIN 534 RANK Change The World /fin534rank.com FIN 534 RANK Change The World /fin534rank.com | Page 49

Inventories 210,000 Total CL $ 70,000
Total CA $294,000 Long-term debt 70,000
Net fixed assets 126,000 Common equity 280,000
Total assets $420,000 Total liab. and equity $420,000
Sales $280,000
Net income $ 21,000
The new CFO thinks that inventories are excessive and could be lowered
sufficiently to cause the current ratio to equal the industry average, 2.70,
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?
a. 4.28%
b. 4.50%
c. 4.73%
d. 4.96%
e. 5.21%
5. Quigley Inc. is considering two financial plans for the coming year.
Management expects sales to be $301,770, operating costs to be
$266,545, assets to be $200,000, and its tax rate to be 35%. Under Plan
A it would use 25% debt and 75% common equity. The interest rate on
the debt would be 8.8%, but the TIE ratio would have to be kept at 4.00