Return on Equity and Quick Ratio

Return on Equity and Quick Ratio

Lloyd Inc. has sales of $500,000, a net income of $60,000, and the following balance sheet: Cash $106,800 Accounts payable $118,800 Receivables 168,000 Other current liabilities 86,400 Inventories 720,000 Long-term debt 189,600 Net fixed assets 205,200 Common equity 805,200 Total assets $1,200,000 Total liabilities and equity $1,200,000

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, 2x, without affecting sales or net income. If inventories are sold and not replaced (thus reducing the current ratio to 2x), 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

 

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