Reference no: EM132396814

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

Cash $ 10,000                                                            Accounts payable $ 30,000

Receivables 50,000                                        Notes payable to bank $20,000

Inventories 150,000                                       Total current liabilities $ 50,000

Total assets $210,000                                                Long-term debt $50,000

Net Fixed Assets 90,000                                Common equity $200,000

Total Assets $300,000                             Total liabilities and equity $300,000

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, 2.5×, without affecting sales or net income. If inventories are sold 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 quick ratio?