XYZ’s balance sheet and income statement are given below: Balance Sheet Cash 50 Accounts payable 100 A/R 150 Notes payable - Inventories 300 Long-term debt (10%) 700 Fixed assets 500 Common equity (20 shares) 200 Total assets 1,000 Total liabilities and equity 1,000 Income Statement Sales 1,000 Cost of goods sold 855 EBIT 145 Interest 70 EBT 75 Taxes (33.33%) 25 Net income 50 The industry average inventory turnover is 5, the interest rate on the firm’s long-term debt is 10 percent, 20 shares are outstanding, and the stock sells at a P/E of 8.0. If XYZ changed its inventory methods so as to operate at the industry average inventory turnover, if it used the funds generated by this change to buy back common stock at the current market price and thus to reduce common equity, and if sales, the cost of goods sold, and the P/E ratio remained constant, by what dollar amount would its stock price increase?
XYZ’s balance sheet and income statement are given below:
Balance Sheet
Cash 50 Accounts payable 100
A/R 150 Notes payable -
Inventories 300 Long-term debt (10%) 700
Fixed assets 500 Common equity (20 shares) 200
Total assets 1,000 Total liabilities and equity 1,000
Income Statement
Sales 1,000
Cost of goods sold 855
EBIT 145
Interest 70
EBT 75
Taxes (33.33%) 25
Net income 50
The industry average inventory turnover is 5, the interest rate on the firm’s long-term debt is 10
percent, 20 shares are outstanding, and the stock sells at a P/E of 8.0. If XYZ changed its inventory
methods so as to operate at the industry average inventory turnover, if it used the funds generated by
this change to buy back common stock at the current market price and thus to reduce common equity,
and if sales, the cost of goods sold, and the P/E ratio remained constant, by what dollar amount would
its stock price increase?
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