Lloyd Inc. has sales of $400,000, a net income of $28,000, and the following balance sheet:...

Lloyd Inc. has sales of $400,000, a net income of $28,000, and the following balance sheet:

Cash $103,680 Accounts payable $117,720

Receivables 204,120 Notes payable to bank 44,280

Inventories 550,800 Total current liabilities $162,000

Total current assets $858,600 Long-term debt 205,200

Net fixed assets 221,400 Common equity 712,800

Total assets $1,080,000 Total liabilities and equity $1,080,000

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? Do not round intermediate calculations. Round your answer to two decimal places.

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

Expert Solution

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jeff jeffy answered 1 year ago

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