Reference no: EM131970900

Lloyd 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	Notes payable to bank 20,000
Inventories 150,000	Total current liabilities $ 50,000
Total current 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?

Please provide a specific answer.