The granit Company has a target current ratio of 3 but has experinced some difficulties financing its expanding sales in the past few months. The firm has a current ratio of 5 with current assets of $5 million. If Granit expands its receivables and inventories using its short term line of credit, how much additional short term funding can it borrow before its target current ratio is reached?
| Granit Company | |||||||||
| Current Liabilities = Current Assets / Current Ratio | |||||||||
| Current Liabilities = 5000000 / 5 = 1000000 | |||||||||
| Since The Granit Company has a target current ratio of 3.0 in order to borrow extra money use the | |||||||||
| same formula | |||||||||
| Target Current Liabilities = 5000000 / 3 = 1666667 | |||||||||
| So The Mitchem Marble Company can borrow $1,666,667 - $1,000,000 = $666,667 extra. | |||||||||
| This amount will maintain their target current ratio of 3.0 | |||||||||
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