Question

# The Nelson Company has \$1,440,000 in current assets and \$600,000 in current liabilities. Its initial inventory...

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.

1. 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.

\$

2. 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.

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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