Answer:
The new quick ratio is 4.6
Explanation:
Current ratio = Current assets / Current liabilities
2 = (Cash + receivables + inventories) / (Accounts payable + other current liabilities
2 = ($145,800 + $230,040 + inventories ) / $192,780
2 = $375,840 + inventories / $192,780
$385,560 = $375,840 + inventories
Inventories = $385,560 - $375,840
Inventories = $9,720
This means that inventories worth of $881,280 [ $891,000 -$9,720] were sold.
Also, if the funds so gained are used to reduce common equity, meaning buying back the equity at book value, hence common equity is $166,860 [ $1,048,140 - $881,280]
ROE before selling off the inventory = Net income / Stockholder's equity
= $60,000 / $1,048,140
= 0.057 or 5.7%
ROE after selling off the inventory = Net income / Stockholder's equity
= $60,000 / $166,860
= 0.40 or 40%
The firm's new quick ratio
= [ Current assets - inventories] / Current liabilities
= [$1,266,840 - $9,720] / $270,540
= $1,257,140 / $270,540
= 4.6
