Lloyd Inc. has sales of $150,000, a net income of $10,500, and the following balance sheet:...
Lloyd Inc. has sales of $150,000, a net income of $10,500, and the following balance sheet:
Cash $42,000 Accounts payable $38,250 Receivables 60,000 Notes payable to bank 20,625 Inventories 172,500 Total current liabilities $58,875 Total current assets $274,500 Long-term debt 49,500 Net fixed assets 100,500 Common equity 266,625 Total assets $375,000 Total liabilities and equity $375,000
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, 1.75x, without affecting sales or net income.
A) If inventories are sold and not replaced (thus reducing the current ratio to 1.75x); 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.
Homework Answers
For current ratio to be 1.75
Inventory=58875*1.75-60000-42000=1031.25
Hence, inventory sold=172500-1032=171468
New Equity=266625-171468=95157
Earlier RoE=10500/266625=3.93812%
New RoE=10500/95157=11.03440%
Change in RoE=11.03440%-3.93812%=7.09628 percentage points
New quick ratio=(42000+60000)/58875=2
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