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The financial statement information for the Sunflower Corporation is presented below:                Income statement: Sales                      $200,000 Net income          $  15,000                Balance sheet: Cash                                10,000                        Accounts payable                                                30,000 Receivables                    50,000                        Other current liabilities                       20,000  Inventories                  150,000                        Long- term debt                                   50,000 Net fixed assets              90,000                        Common equity                                 200,000 Total assets                  300,000                       Total liabilities and equity                 300,000 The company’s management team thinks that its Inventory level is excessive and can be lowered to a point where the current ratio is equal to the industry average of 2.5, without affecting the firm’s Sales or Net Income. If the firm’s Inventory is sold off and not replaced (thus reducing current ratio to 2.5), and if the funds generated are used to reduce common equity (by paying dividends, for example), and if no other changes occur, by how much will the ROE change? What will be the firm’s new quick ratio?

The financial statement information for the Sunflower Corporation is presented below:                Income statement: Sales                      $200,000 Net income          $  15,000                Balance sheet: Cash                                10,000                        Accounts payable                                                30,000 Receivables                    50,000                        Other current liabilities                       20,000  Inventories                  150,000                        Long- term debt                                   50,000 Net fixed assets              90,000                        Common equity                                 200,000 Total assets                  300,000                       Total liabilities and equity                 300,000 The company’s management team thinks that its Inventory level is excessive and can be lowered to a point where the current ratio is equal to the industry average of 2.5, without affecting the firm’s Sales or Net Income. If the firm’s Inventory is sold off and not replaced (thus reducing current ratio to 2.5), and if the funds generated are used to reduce common equity (by paying dividends, for example), and if no other changes occur, by how much will the ROE change? What will be the firm’s new quick ratio?

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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  • The financial statement information for the Sunflower Corporation is presented below:

               Income statement:

Sales                      $200,000

Net income          $  15,000

               Balance sheet:

Cash                                10,000                        Accounts payable                                                30,000

Receivables                    50,000                        Other current liabilities                       20,000

 Inventories                  150,000                        Long- term debt                                   50,000

Net fixed assets              90,000                        Common equity                                 200,000

Total assets                  300,000                       Total liabilities and equity                 300,000

  • The company’s management team thinks that its Inventory level is excessive and can be lowered to a point where the current ratio is equal to the industry average of 2.5, without affecting the firm’s Sales or Net Income.
  • If the firm’s Inventory is sold off and not replaced (thus reducing current ratio to 2.5), and if the funds generated are used to reduce common equity (by paying dividends, for example), and if no other changes occur, by how much will the ROE change? What will be the firm’s new quick ratio?
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