Lloyd Inc. has sales of $750,000, a net income of $82,500, and the following bal

Question

Lloyd Inc. has sales of $750,000, a net income of $82,500, and the following balance sheet:

Cash.$132,300.Accounts payable..$193,200
Receivables..390,600 .Other current liabilities130,200
Inventories.966,000 Long-term debt296,100
Net Fixed assets..611,100 Common equity1,480,500
Total Assets.$2,100,000 .. Total liabilities and equity..$2,100,000

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.
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? Round your answer to two decimal places.

________ %
What will be the firm's new quick ratio? Round your answer to two decimal places.

________ x

Explanation / Answer

Initial ROE = net income/shareholder' equity = 82,500/1,480,500  = 0.056

New ROE = 82,500/(1,480,500 - 966000) = 0.160

change in RoE = 0.160 - 0.056 = 0.104

New quick ratio = (current assets - inventories)/current liabilities
= (132300 +390600 - 0)/(193200 + 130200)  (since inventories are sold out and the money is used to reduce equity
= 1.62

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