Calculation of Ratio Analysis.
Your company had the following balance sheet and income statement information for 2003:
|
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
|
The industry average inventory turnover is 5. You think you can change your inventory control system so as to cause your turnover to equal the industry average, and this change is expected to have no effect on either sales or cost of goods sold. The cash generated from reducing inventories will be used to buy tax-exempt securities which have a? percent rate of return. What will your profit margin be after the change in inventories reflected in the income statement?
a. 2.1%
b. 2.4%
c. 4.5%
d. 5.3%
e. 6.7%