Answer:
The firm's new quick ratio is 2.9
Explanation:
The current ratio is calculated as
Current ratio = Current assets / Current liabilities
2.5 times = (Cash + receivables + Inventories ) / (Accounts payable + Other current liabilities)
2.5 = ($10,000 + $50,000 + Inventories) / $50,000
$60,000 + inventories = $125,000
Inventories = $65,000
Therefore, $85,000 worth of inventories were sold off.
If the funds generated are used to reduce the common equity that is by repurchasing the equity at book value.
Hence, the common equity amounts to $115,000
Calculating the ROE before the inventory is sold off:
ROE = Net income / Stockholder's equity
= $15,000 / $200,000
= 0.075 or 7.5%
Calculating the ROE after selling off the inventory:
ROE = $15,000 / $115,000
= 0.13 or 13%
The firm's new quick ratio is
Quick ratio = (Current assets - Inventories) / Current liabilities
= ($210,000 - $65,000) / $50,000
= 2.9
