Question

The Nelson Company has $1,440,000 in current assets and $600,000 in current liabilities. Its initial inventory level is $480,000, 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 1.9? Round your answer to
the nearest cent.
$

- What will be the firm's quick ratio after Nelson has raised the maximum amount of short-term funds? Round your answer to two decimal places.

Answer #1

Provided:

Current assets= $1,440,000

Current liabilities= $600,000

Since the additional notes payable I raised will be used in inventory, the new current assets:

=$1,440,000+ I

Current ratio= current assets/ current liabilities

1.9= $1,440,000+ I/ $600,000 + I

Solving the above, I = $333,333.

Therefore, the maximum short term debt
that can be raised is **$333,333.**

The new inventory= $480,000 + $333,333= $813,333.

Quick ratio= Current assets- inventory/ Current liabilities

= $1,440,000- 813,333/ $600,000

= $626,667/ $600,000 = **1.04.**

Therefore, the firm’s quick ratio will be 1.04 after nelson has raised the maximum amount of short term funds.

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