Enterprise has sales of 200,000, a net income of 15,000?and the following balance sheet: Cash 10K receivables 50K inventories 150K net fixed assets 90k total assets 300K Accounts payable 30K other current liabilities 30K long term debt 40k owners equity 200K total liabilities and equity 300K
1. The owner of the enterprise thinks that inventories are excessive and can be lowered to the point where current ratio is equal to industry average of 2.5X, without affecting either sales or net income. The owner proposes that if inventories are sold off and not replaced so as to reduce owners equity(through drawings) and if no other changes occur, by how much will the ROE change?
2. How would your answer in number 1 change if we doubled all the amounts?
A. We stated that the target current ratio was 3.0X
B. We stated that the target was to achieve an inventory turnover of 2.0X rather than a current ratio of 2.5X