Lloyd Inc. has sales of $200,000, a net income of$15,000, and the following balance sheet: Cash $ 10,000 Accounts payable $ 30,000Receivables 50,000 Notes payable to bank 20,000Inventories 150,000 Total current liabilities $ 50,000Total current assets $ 210,000 Long-term debt 50,000Net fixed assets 90,000 Common equity 200,000Total assets $ 300,000 Total liabilities and equity $300,000The new owner thinks that inventories are excessive and can be lowered to the pointwhere the current ratio is equal to the industry average, 2.53, without affecting sales or netincome. If inventories are sold and not replaced (thus reducing the current ratio to 2.53), ifthe funds generated are used to reduce common equity (stock can be repurchased at bookvalue), and if no other changes occur, by how much will the ROE change? What will be thefirm’s new quick ratio?
Lloyd Inc. has sales of $200,000, a net income of
$15,000, and the following
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, 2.53, without affecting sales or net
income. If inventories are sold and not replaced (thus reducing the current ratio to 2.53), 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
firm’s new quick ratio?
Trending now
This is a popular solution!
Step by step
Solved in 3 steps
