The Nelson Company has $1,530,000 in current assets and $510,000 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.
Present current ratio=Current assets/Current liabilities
Since the debt will be used to increase current asstes by equal amount ,let the increase in assets=increase in liabilities=x
Therefore since new Current ratio cannot get betow 1.8
We get X=765000 (Amount by which short-term debt (notes payable) increase without pushing its current ratio below 1.8)
Now Quick Ratio = (Current Assets – Inventory)/Current Liabilities (CL)
New current asset after increase=1530000+765000=2295000
New Current liabilities=510000+765000=1275000
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