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Return on Equity and Quick Ratio Lloyd Inc. has sales of $300,000, a net income of $30,000, and the following balance sheet: Cash $61,380 Accounts
Return on Equity and Quick Ratio Lloyd Inc. has sales of $300,000, a net income of $30,000, and the following balance sheet: Cash $61,380 Accounts payable $61,380 Receivables 108,240 Other current liabilities 21,120 Inventories 336,600 Long-term debt 127,380 Net fixed assets 153,780 Common equity 450,120 Total assets $660,000 Total liabilities and equity $660,000 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. a. 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. % b. What will be the firm's new quick ratio? Round your answer to two decimal places
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