Question

The Stewart Company has $1,666,500 in current assets and $633,270 in current liabilities. Its initial inventory level is $399,960, and it will raise funds as additional notes payable and use them to increase inventory. How much can its short-term debt (notes payable) increase without pushing its current ratio below 2.0? Round your answer to the nearest cent.

Answer 1

The current ratio shouldn't go below 2, it means that maximum reduction in current ratio up to 2 is acceptable, so the desired current ratio is 2

Let us assume X be the amount of short term debt (notes payables) which will be used to increase the inventory.

Desired current ratio = ( Current assets + X ) / ( Current liabilities + X )

2 = ( 1666500 + X ) / ( 633270 + X )

2 * ( 633270 + X ) = 1666500 + X

1266540 + 2X = 1666500 + X

2X - X = 1666500 -1266540

X = 399960.00