Question

Working capital: Mukhopadhya Network Associates has a current ratio of 1.60, where the current ratio is defined as follows: Current ratio = Current assets/Current liabilities. The firm's current assets are equal to $1,233,265, its accounts payables are $419,357, and its notes payables are $351,663. Its inventory is currently at $721,599. The company plans to raise funds in the short-term debt market and invest the entire amount in additional inventory. How much can note payable increase without the current ratio falling below 1.50?

Answer 1

Hi,
Its more of a mathematical question rather than a finance question.

So,

From question itself, the answer is half solved.

Current ratio is fetched as :

Current assets = 1233265

Current liabilities = Accounts payable + Notes payable = 419357 + 351663

Therefore, current ratio is

1233265 / (419357 + 351663), which gives us the value as 1.6 (Already given in the question)

Now,
They want to raise fund and the total amount raised will be used for buying inventory.

This will result in increased current assets as well as current liabilities with the same amount.

Also, they don't want the current ratio to fall below 1.5.

Therefore, the newer equation that arise is given as

1233265 + x / ( 419357 + 351663 + x ) = 1.5
Whereby, x is the increase in the note payable amount.

Solve the above equation and we will get the value as "135470"

So, the increase in the note payable amount is 135470
While the total note payable amount will reach to 351663 + 135470 = "487133"
Total current assets will be 1233265 + 135470 = "1368735"
Cross check the ratio and we will get the same 1.5 as our current ratio.

Thank you,If you still have any doubt, will be happier to clarify that also.