Question
Return on Equity and Quick Ratio Lloyd Inc. has sales of $250,000, a net income of $27,500, and the following balance sheet: Cash $79,100 Accounts
Return on Equity and Quick Ratio
Lloyd Inc. has sales of $250,000, a net income of $27,500, and the following balance sheet:
Cash | $79,100 | Accounts payable | $78,400 | |
Receivables | 84,000 | Other current liabilities | 32,200 | |
Inventories | 287,000 | Long-term debt | 123,200 | |
Net fixed assets | 249,900 | Common equity | 466,200 | |
Total assets | $700,000 | Total liabilities and equity | $700,000 |
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, 2.25x, without affecting sales or net income.
If inventories are sold and not replaced (thus reducing the current ratio to 2.25x), 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? Round your answer to two decimal places. %
What will be the firm's new quick ratio? Round your answer to two decimal places. x
DSO and Accounts Receivable
Harrelson Inc. currently has $950,000 in accounts receivable, and its days sales outstanding (DSO) is 72 days. It wants to reduce its DSO to 25 days by pressuring more of its customers to pay their bills on time. If this policy is adopted, the company's average sales will fall by 20%. What will be the level of accounts receivable following the change? Assume a 365-day year. Round your answer to the nearest cent.
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