The Nelson Company has $1,302,000 in current assets and $465,000 in current liabilities. Its initial inventory level is $305,000

The Nelson Company has $1,302,000 in current assets and $465,000 in current liabilities. Its initial inventory level is $305,000, 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 2.0? 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.

_________

Expert Solution

Current ratio = current assets/ current liabilities

Let the increase in notes payable be x.

2 = ( $1,302,000 + x ) / ( $465,000 + x )

$930,000 + 2x = $1,302,000 + x

2x - x = $1,302,000 - $930,000

x = $372,000.

Quick ratio = Current assets- inventory/ Current liabilities

= ( $1,302,000 - $305,000 ) / ( $465,000 + $372,000 )

= $997,000 / $837,000

= 1.19.

Current ratio is $372,000.

Quick ratio is 1.19.

Junaid answered 2 years ago

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