Question

The Nelson Company has $1,428,000 in current assets and $510,000 in current liabilities. Its initial inventory level is $340,000, and it will raise funds as additional notes payable and use them to increase inventory. How much can Nelson's short-term debt (notes payable) increase without pushing its current ratio below 1.8? Do not round intermediate calculations. Round your answer to the nearest dollar.

What will be the firm's quick ratio after Nelson has raised the maximum amount of short-term funds? Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

(a)Additonal funds that it can take in the form of short term debt = x. As the short term debt increases, the current liabities increase by x and the current assets also increase by

(1,428,000 + x) /(510,000 + x) = 1.8

1,428,000 + x = 918,000 + 1.8 x

1,428,000 -918,000 = 1.8x -x

510,000 =0.8x

x = 637,500

Nelson's short term debt can increase by $637,500

(b) Inventory (total) = 340,000 + 637,500 = 977,500

Quick ratio = (Current assets - Inventory)/ Current liabilties

Quick ratio = (1,428,000 - 977,500)/1,147,500 = 0.3925 = 0.39 (Rounded to 2 decimals)