Problem 4-14 Return on Equity and Quick Ratio

Lloyd Inc. has sales of $300,000, a net income of $27,000, and the following balance sheet:

Cash	$46,500		Accounts payable	$90,000
Receivables	149,250		Other current liabilities	42,000
Inventories	315,000		Long-term debt	115,500
Net fixed assets	239,250		Common equity	502,500
Total assets	$750,000		Total liabilities and equity	$750,000

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? Round your answer to two decimal places. ____________ %
2. What will be the firm's new quick ratio? Round your answer to two decimal places. ____________ x