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Category > Business & Finance Posted 28 May 2017 My Price 9.00

Problem 4-14 Return on Equity and Quick Ratio

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
 

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Status NEW Posted 28 May 2017 09:05 AM My Price 9.00

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