Lloyd Inc. has sales of $700,000, a net income of $42,000, andthe following balance sheet:
Cash$105,840 Accounts payable$181,440Receivables275,520 Notes payable to bank100,800Inventories957,600 Total current liabilities$282,240Total current assets$1,338,960 Long-term debt330,960Net fixed assets341,040 Common equity1,066,800Total assets$1,680,000 Total liabilities and equity$1,680,000
The new owner thinks that inventories are excessive and can belowered to the point where the current ratio is equal to theindustry average, 2.25x, without affecting sales or net income.
If inventories are sold and not replaced (thus reducing thecurrent ratio to 2.25x); if the funds generated are used to reducecommon equity (stock can be repurchased at book value); and if noother changes occur, by how much will the ROE change?
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