Problem:
Lloyd Inc. has sales of $200,000, a net income of $14,000, and the following balance sheet:
| Cash |
$27,840 |
Accounts payable |
$31,360 |
| Receivables |
55,040 |
Other current liabilities |
9,600 |
| Inventories |
131,200 |
Long-term debt |
61,120 |
| Net fixed assets |
105,920 |
Common equity |
217,920 |
| Total assets |
$320,000 |
Total liabilities and equity |
$320,000 |
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, 2.5x, without affecting sales or net income.
Required:
If inventories are sold and not replaced (thus reducing the current ratio to 2.5x), 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. What will be the firm's new quick ratio? Round your answer to two decimal places.
Note: Please show basic calculation