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.
- 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
- Current Liabilities = $485,000 + $323,333 = $808,333
Quick ratio = $1100,000/$808,333
Quick ratio = 1.36 times
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