Savelots Stores’ current financial statements are shown below: Balance Sheet Inventories 500 Accounts payable 100 Other current assets 400 Short-term notes payable 370 Fixed assets 370 Common equity 800 Total assets 1,270 Total liab. and equity 1,270 Income Statement Sales 2,000 Operating costs 1,843 EBIT 157 Interest 37 EBT 120 Taxes (40%) 48 Net income 72 A recently released report indicates that Savelots’ current ratio of 1.9 is in line with the industry average. However, its accounts payable, which have no interest cost and are due entirely to purchases of inventories, amount to only 20 percent of inventories versus an industry average of 60 percent. Suppose Savelots took actions to increase its accounts payable to inventories ratio to the 60 percent industry average, but it (1) kept all of its assets at their present levels (that is, the asset side of the balance sheet remains constant) and (2) also held its current ratio constant at 1.9. Assume that Savelots’ tax rate is 40 percent, that its cost of short-term debt is 10 percent, and that the change in payments will not affect operations. In addition, common equity will not change. With the changes, what will be Savelots’ new ROE?
. Savelots Stores’ current financial statements are shown below:
Balance Sheet
Inventories 500 Accounts payable 100
Other current assets 400 Short-term notes payable 370
Fixed assets 370 Common equity 800
Total assets 1,270 Total liab. and equity 1,270
Income Statement
Sales 2,000
Operating
costs
1,843
EBIT 157
Interest 37
EBT 120
Taxes (40%) 48
Net income 72
A recently released report indicates that Savelots’ current ratio of 1.9 is in line with the industry
average. However, its accounts payable, which have no interest cost and are due entirely to purchases
of inventories, amount to only 20 percent of inventories versus an industry average of 60 percent.
Suppose Savelots took actions to increase its accounts payable to inventories ratio to the 60 percent
industry average, but it (1) kept all of its assets at their present levels (that is, the asset side of the
balance sheet remains constant) and (2) also held its current ratio constant at 1.9. Assume that
Savelots’ tax rate is 40 percent, that its cost of short-term debt is 10 percent, and that the change in
payments will not affect operations. In addition, common equity will not change. With the changes,
what will be Savelots’ new
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