Answer:
The ROE will increase by 7.69% to 14.29% from 7.5%
Explanation:
Current liabilities:
account payable 42,000
Other 28,000
Total Liabilities: 70,000
IF we want a current ratio of 2.3 then:
70,000 x 2.3 = 161,000 Current assets are needed.
Right now, the companny has 294,000 current assets so it will make inventories decrease by:
294,000 - 161,000 = 133,000
Then with that will purchase common stock:
280,000 - 133,000 = 147,000 common stock will be outstanding
The Return on equity will be:
21,000 / 147,000 = 0.142857 = 14.29%
While currently the ROE is:
21,000/280,000 = 0.075 = 7.5%
There will be an increase for: 14.29 - 7.5 = 6.79%
