Question

The Stewart Company has $1,895,500 in current assets and $777,155 in current liabilities. Its initial inventory level is $454,920, 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 dollar.

Answer 1

1. Current Ratio Required = 2.0

(Current Assets + Increase in Inventory) / (Current Liabilities + Increase in Short term Notes Payable) = 2.0

(1895500 + Increase in Inventory) / (777155 + Increase in Short term Notes Payable) = 2.0

1895500 + Increase in Inventory = 1554310 + 2 * Increase in Short term Notes Payable

341190 = 2 * Increase in Short term Notes Payable - Increase in Inventory

341190 = 2 * Increase in Short term Notes Payable - Increase in Short term Notes Payable

Increase in Short term Notes Payable = 341190