Lloyd Inc. has sales of $200,000, a net income of $15,000, and the following balance sheet:
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Cash $ 10,000
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Accounts payable $ 30,000
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Receivables 50,000
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Notes payable to bank 20,000
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Inventories 150,000
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Total current liabilities $ 50,000
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Total current assets $210,000
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Long-term debt 50,000
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Net fixed assets 90,000
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Common equity 200,000
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Total assets $300,000
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Total liabilities and equity $300,000
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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, 2.5×, without affecting sales or net income.
If inventories are sold and not replaced (thus reducing the current ratio to 2.5×), 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?
What will be the firm's new quick ratio?
Please provide a specific answer.