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Q1) Company had balance sheet and income statement information for 2003 which are as follows:

 

Balance Sheet
Cash $20
A/R 1,000
Inventories 5,000
Total C.A. $6,020 Debt 4,000
Net F.A. 2,980 Equity 5,000
Total Assets $9,000 Total Claims $9,000

 

 

Income Statement
Sales $10,000
Cost of Goods Sold $9,200
EBIT $800
Interest (10%) $400
EBT $400
Taxes (40%) $160
Net Income $240

 

Industry average inventory turnover is 5. You think you can change the inventory control system so as to cause your turnover to equal industry average, and this change is expected to have no effect on either sales or cost of goods sold. Cash generated from decreasing inventories will be used to purchase tax-exempt securities which have a? percent rate of return. Determine the profit margin be after the change in inventories reflected in income statement?

a. 2.1%
b. 2.4%
c. 4.5%
d. 5.3%
e. 6.7%

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