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RETURN ON EQUITY AND QUICK RATIO Lloyd Inc. has sales of $650,000, a net income...

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Accounting

RETURN ON EQUITY AND QUICK RATIO

Lloyd Inc. has sales of $650,000, a net income of $78,000, and the following balance sheet:

Cash $130,390 Accounts payable $110,500
Receivables 218,790 Notes payable to bank 88,400
Inventories 430,950 Total current liabilities $198,900
Total current assets $780,130 Long-term debt 204,425
Net fixed assets 324,870 Common equity 701,675
Total assets $1,105,000 Total liabilities and equity $1,105,000

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.

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

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