RETURN ON EQUITY AND QUICK RATIO Lloyd Inc. has sales of $350,000, a net income of...

RETURN ON EQUITY AND QUICK RATIO

Lloyd Inc. has sales of $350,000, a net income of $35,000, and the following balance sheet:

Cash	$75,460	Accounts payable	$63,140
Receivables	105,490	Notes payable to bank	24,640
Inventories	369,600	Total current liabilities	$87,780
Total current assets	$550,550	Long-term debt	146,300
Net fixed assets	219,450	Common equity	535,920
Total assets	$770,000	Total liabilities and equity	$770,000

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? Do not round intermediate calculations. Round your answer to two decimal places.
What will be the firm's new quick ratio? Do not round intermediate calculations. Round your answer to two decimal places.

Expert Solution

jeff jeffy answered 2 months ago

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