If inventories are sold and not replaced thus reducing the

Reference no: EM13481534

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

Cash $10,000 Accounts Payable $30,000
Receivables $50,000 Other currentliabilities $20,000
Inventories $150,000 Long-term debt$50,000
Net fixed asset $90,000 Common equity $200,000
Total Assets $300,000 Total liabilities & equity $300,000

The new owner thinks that inventories are excessive and can belowered to the point where the current ratio is equal to theindustry average, 2.5X, without affecting either sales or netincome. If inventories are sold and not replaced thus reducing thecurrent ratio to 2.5X, if the funds generated are used to reducecommon equity (stock can be repurchased at book value), and if noother changes occur, by how much will the ROE change? What will be the firm's new quick ratio?

Reference no: EM13481534

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