Click here to read the eBook: Profitability Ratios Problem Walk-Through RETURN ON EQUITY AND QUICK...
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Click here to read the eBook: Profitability Ratios Problem Walk-Through RETURN ON EQUITY AND QUICK RATIO Lloyd Inc. has sales of $100,000, a net income of $12,000, and the following balance sheet: Cash $14,720 Accounts payable $17,120 Receivables 24,640 Notes payable to bank 9,280 Inventories 59,200 Total current liabilities $26,400 Total current assets $98,560 Long-term debt 22,240 Net fixed assets 61,440 Common equity 111,360 Total assets $160,000 Total liabilities and equity $160,000 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. a. 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? Do not round intermediate calculations. Round your answer to two decimal places. b. What will be the firm's new quick ratio? Do not round intermediate calculations. Round your answer to two decimal places
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