Garamond Corporation reported the following income statement and balance sheet for the previous year: Balance Sheet Cash P 100,000 Inventories 1,000,000 Accounts receivable 500,000 Current assets P1,600,000 Total debt P4,000,000 Net fixed assets 4,400,000 Total equity 2,000,000 Total assets P6,000,000 Total claims P6,000,000 Income Statement Sales P3,000,000 Operating costs 1,600,000 Operating income (EBIT) P1,400,000 Interest 400,000 Taxable income (EBT) P1,000,000 Taxes (40%) 400,000 Net income P 600,000 The company's interest cost is 10%, so the company's interest expense each year is 10% of its total debt. While the company's financial performance is quite strong, its CFO is always looking for ways to improve. The CFO has noticed that the company's inventory turnover ratio is considerably weaker than the industry average, which is 6.0. The CFO asks what the company's ROE would have been last year if the following had occurred: • The company maintained the sale sales, but was able to reduce inventories enough to achieve the industry average inventory turnover ratio. • The cash that was generated from the reduction in inventories was used to reduce part of the company's outstanding debt. So, the company's total debt would have been P4 million less the freed-up cash from the improvement in inventory policy. The company's interest expense would have been 10% of new total debt. • Assume equity does not change. (The company pays all net income as dividends.) What would have been the company's ROE last year? A. 29.5% B. 31.5% C. 27.0% D. 30.3%
Garamond Corporation reported the following income statement and balance sheet for the previous year:
Balance Sheet
Cash P 100,000
Inventories 1,000,000
Current assets P1,600,000
Total debt P4,000,000
Net fixed assets 4,400,000
Total equity 2,000,000
Total assets P6,000,000
Total claims P6,000,000
Income Statement
Sales P3,000,000
Operating costs 1,600,000
Operating income (EBIT) P1,400,000
Interest 400,000
Taxable income (EBT) P1,000,000
Taxes (40%) 400,000
Net income P 600,000
The company's interest cost is 10%, so the company's interest expense each year is 10% of its total debt. While the company's financial performance is quite strong, its CFO is always looking for ways to improve. The CFO has noticed that the company's inventory turnover ratio is considerably weaker than the industry average, which is 6.0. The CFO asks what the company's ROE would have been last year if the following had occurred:
• The company maintained the sale sales, but was able to reduce inventories enough to achieve the industry average inventory turnover ratio.
• The cash that was generated from the reduction in inventories was used to reduce part of the company's outstanding debt. So, the company's total debt would have been P4 million less the freed-up cash from the improvement in inventory policy. The company's interest expense would have been 10% of new total debt.
• Assume equity does not change. (The company pays all net income as dividends.)
What would have been the company's ROE last year?
A. 29.5%
B. 31.5%
C. 27.0%
D. 30.3%
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