Lloyd Inc. has sales of $200,000, a net income of $15,000, and the following balance sheet:

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, 2.5#, without affecting sales or net income. If inventories are sold off and not replaced (thus reducing the current ratio to 2.5#), 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? What will be the firm's new quickratio?

Transcribed Image Text:

Accounts payable Other current liabilities Long-term debt Common equity Total liabilities and equity Cash Receivables Inventories Net fixed assets Total assets S 10,000 $ 30,000 20,000 50,000 200,000 $300,000 150,000 90,000 $300,000