15. Problem 4.15 (Return on Equity and Quick Ratio)

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Lloyd Inc. has sales of $600,000, a net income of $36,000, and the following balance sheet:

Cash	$	96,600		Accounts payable	$	147,660
Receivables		269,100		Notes payable to bank		99,360
Inventories		786,600		Total current liabilities	$	247,020
Total current assets	$	1,152,300		Long-term debt		245,640
Net fixed assets		227,700		Common equity		887,340
Total assets	$	1,380,000		Total liabilities and equity	$	1,380,000

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, 1.75, without affecting sales or net income. If inventories are sold and not replaced (thus reducing the current ratio to 1.75), 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.

ROE will (increase or decrease) by ___ percentage points?

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