Question

The Nelson Company has $1,455,000 in current assets and $485,000 in current liabilities. Its initial inventory level is $355,000, 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

- Current Assets = $1,455,000

Current Liabilities = $485,000

Current Ratio = 1.8

Let the Increase in Short-Term Debt be X

Current Ratio = Current Assets/Current Liabilities

1.8 = $1455,000/($485,000 + X)

$873,000 + 1.8X = $1455,000

$582,000 = 1.8X

X = $323,333.33

So, Nelson's short-term debt (notes payable) increase without pushing its current ratio below 1.8 is $323,333

b). Quick ratio = Quick Assets/Current Liabilities

where, Quick Asset = Current Assets - Inventory = $1455,000 - $355,000

= $1100,000

- Current Liabilities = $485,000 + $323,333 = $808,333

Quick ratio = $1100,000/$808,333

Quick ratio = 1.36 times

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