Question: Problem 4-14 Return on Equity and Quick Ratio Lloyd Inc. has sales of $350,000, a net income of $38,500, and the following balance sheet: Cash

Problem 4-14 Return on Equity and Quick Ratio

Lloyd Inc. has sales of $350,000, a net income of $38,500, and the following balance sheet:

Cash	$87,010	Accounts payable	$63,910
Receivables	107,800	Other current liabilities	40,040
Inventories	346,500	Long-term debt	99,330
Net fixed assets	228,690	Common equity	566,720
Total assets	$770,000	Total liabilities and equity	$770,000

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, 2.5x, without affecting sales or net income.

If inventories are sold and not replaced (thus reducing the current ratio to 2.5x), 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.

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