4-15 RETURN ON EQUITY AND QUICK RATIO Lloyd Inc. has sales of $200,000, a net income of $15,000, and the following balance sheet: Cash Receivables Inventories Total current assets Net fixed assets Total assets $ 10,000 Accounts payable 50,000 150,000 $210,000 90,000 $300,000 Notes payable to bank Total current liabilities Long-term debt Common equity Total liabilities and equity $ 30,000 20,000 $ 50,000 50,000 200,000 $300,000 The new owner thinks that inventories are excessive and can be lowered to the point where the current ratio is equal to the industry average, 2.5x, without affecting sales or net income. If inventories are sold and not replaced (thus reducing the current ratio to 2.5x); if the funds generated are used to reduce common equity (stock can be repurchased at book value); and if no other changes occur, by how much will the ROE change? What will be the firm's new quick ratio?

15 RETURN ON EQUITY AND QUICK RATIO Lloyd Inc. has sales of $200,000, a net income of $15,000, and the following balance sheet: The new owner thinks that inventories are excessive and can be lowered to the point where the current ratio is equal to the industry average, 2.5, without affecting sales or net income. If inventories are sold and not replaced (thus reducing the current ratio to 2.5 ); if the funds generated are used to reduce common equity (stock can be repurchased at book value); and if no other changes occur, by how much will the ROE change? What will be the firm's new quick ratio