:-MndTap. Cengage L. x Blackboard Lea ew Favorites Tools Help INDTAP Cengage Q S
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:-MndTap. Cengage L. x Blackboard Lea ew Favorites Tools Help INDTAP Cengage Q Search this cou mework RETURN ON EQUITY AND QUICK RATIO Lloyd Inc. has sales of $400,000, a net income of $32,000, and the following balance sheet: Cash Receivables Inventories Total current assets Net fixed assets Total assets The new owner thinks that inventories 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); i $71,280 Accounts payable 145,200 343,200 $73,040 70,400 $143,440 154,880 581,680 $880,000 Notes payable to bank Total current liabilities $559,680 Long-term debt 320,320 Common equity Total liabilities and equity are excessive and can be lowered to the point where the current ratio is equal to the industry $880,000 f the funds generated are used to reduce common can be repurchased at book value); and if no other changes occur, by how much will the ROE change? Do not round equity (stock intermediate calculations. Round your answer to two decimal places.Explanation / Answer
a. Present current ratio = total current assets/total current liabilities = 559,680/143,440 = 3.90
New current ratio = 2.5. Thus 2.5 = new level of current assets/143,440
Or new level of current assets = 2.5*143,440 = 358,600. Thus reduction of inventories = 559,680-358,600 = 210,080
Thus new level of inventories = 343,200-210,080 = 142,120
Now current amount of ROE = Net income/Common equity = 32,000/581,680 = 5.50%
New equity balance = current equity balance – reduction in inventory = 581,680 – 210,080 =380,600
Thus new ROE = 32,000/380,600 = 8.41%
Thus new ROE = 8.41% and change in ROE = 8.41%-5.50% = 2.91%
B. Quick ratio = (current assets – inventories)/current liabilities
= (358600-142120)/143440
= 1.51x
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