Return on Equity and Quick Ratio
Lloyd Inc. has sales of $250,000, a net income of $25,0...
Business, 20.02.2020 01:07, aliami0306oyaj0n
Return on Equity and Quick Ratio
Lloyd Inc. has sales of $250,000, a net income of $25,000, and the following balance sheet:
Cash $69,750 Accounts payable $79,500
Receivables 112,500 Other current liabilities 45,000
Inventories 435,000 Long-term debt 94,500
Net fixed assets 132,750 Common equity 531,000
Total assets $750,000 Total liabilities and equity $750,000
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? Round your answer to two decimal places.
What will be the firm's new quick ratio? Round your answer to two decimal places. x
Answers: 2
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