Return on equity and quick ration: A company has sales of $200,000, a net income of $15,000 and the following balance sheet:

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Return on equity and quick ration:  A company has sales of $200,000, a net income of $15,000 and the following balance sheet:

 

Cash                $10,000                                   Accounts payable        $ 30,000

Receivables     $50,000                                   other current liabilities $ 20,000

Inventories       $150,000                     Long term debt                        $ 50,000

Net fixed assets$90,000                                  Common equity                       $200,000

                        ------------                                                         ------------

Total assets      $300,000                     Total liabilities & 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 of 2.5x, without affecting either sales or net income.  If inventories are sold off 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?  What will be the firm’s new quick ratio?

    • 6 years ago
    Return on equity and quick ration: A company has sales of $200,000, a net income of $15,000 and the following balance sheet:
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