9. Batty Bricks inc. has the following balance sheet and income statement Amount
ID: 2810052 • Letter: 9
Question
9. Batty Bricks inc. has the following balance sheet and income statement Amount Amount 32,000 19,000 51,000 120,000 85,000 Total assets 256,000 Total liabilities & equity 256,000 Cash Receivables Inventony Current assets 152,000 Long-term debt Net fixed assets 104,000 Equity 24,000 Accounts payable 33,000 Other current liabilities 95,000 Current liabilities Sales were $220,000 and net income was $44,000 for the year The CFO thinks that inventories are excessive and could be reduced until the current ratio equals the industry average of 2.1, without affecting sales or net income. The funds generated by selling off inventory are used to buy back common stock at book value. a. What is the new level of current assets with a current ratio of 2.1? b. What should be the new level of inventory? C. How much inventory should be sold off? d. What is the new book value of common equity after the buyback? e. What is the new ROE after the stock buyback? f. What's the change in ROE?Explanation / Answer
Answer to Part a.
Target Current Ratio = 2.1
Current Liabilities will remain Same for Targeted Current Ratio.
Current Ratio = Current Assets / Current Liabilities
2.1 = New Current Assets / 51,000
New Current Assets = $107,100
Therefore, New Level of Current Assets with a Current Ratio of 2.1 is $107,100.
Answer to Part b.
New Current Assets = Cash + Receivable + New Inventory
$107,100 = $24,000 + $33,000 + New Inventory
New Inventory = $50,100
Answer to Part c.
Current Inventory = $95,000
New Inventory = $50,100
Inventory to be sold off = $95,000 - $50,100
Inventory to be sold off = $44,900
Answer to Part d.
Sale proceed of Inventory will be used to Buy back common Stock.
Therefore, $44,900 will be used to Buy back common Stock.
Current Equity = $85,000
New Book Value of Equity = $85,000 - $44,900
New Book Value of Equity = $40,100
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