Question 1
Lindley Corp.’s stock price at the end of last year was $48.71, and its book value per share was $40.50. What was its market/book ratio?
◦
1.56
◦
1.40
◦
1.31
◦
1.20
Question 2
Muscarella Inc. has the following balance sheet and income statement data:
Cash | $ 15,000 | | Accounts payable | $ 48,000 |
Receivables | 80,000 | | Other current liabilities | 32,000 |
Inventories | 230,000 | | Total CL | 80,000 |
Total CA | 325,000 | | Long-term debt | 90,000 |
Net fixed assets | 155,000 | | Common equity | 310,000 |
Total assets | $480,000 | | Total liab. and equity | $480,000 |
Sales | $310,000 | | | |
Net income | $26,000 | | | |
| | | | | |
The new CFO thinks that inventories are excessive and could be lowered sufficiently to cause the current ratio to equal the industry average, 2.8, without affecting either sales or net income. Assuming that inventories are sold off and not replaced to get the current ratio to the target level, and that the funds generated are used to buy back common shares at book value, by how much would the ROE change?
◦
3.51%
◦
3.80%
◦
4.05%
◦
4.29%
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