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 $ 10,000 Accounts payable $ 30,000

Receivables 50,000 Notes payable to bank 20,000

Inventories 150,000 Total current liabilities $ 50,000

Total current assets $210,000 Long-term debt 50,000

Net fixed assets 90,000 Common equity 200,000

Total assets $300,000 Total liabilities and equity $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, 2.5, 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 firms new quick ratio?

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