Question

In: Finance

Ronaldinho Trading Co. is required by its bank to maintain a current ratio of at least...

Ronaldinho Trading Co. is required by its bank to maintain a current ratio of at least 1.50, and its current ratio now is 2.25. The firm plans to acquire additional inventory to meet an unexpected surge in the demand for its products, and will pay for the inventory with short-term debt. How much inventory can the firm purchase without violating its debt agreement if their total current assets now equal $3.5 million?

A. $1.28 million

B. $1.75 million

C. $2.33 million

D. $2.80 million

Expert Solution

Present current asset = 3.5M

Present current ratio = 2.25

Present Current ratio = Present Current asset / Prensent Current liabilites

Present current liabilites = Present current asset / Present current ratio

Present current liabilities = 3.5/2.25 = 1.555556

Now in order to calcuate the amount of inentory which can be added with out violating the debt agreement, below equation will be made.

Lets assume the amount of increment to in current asset and current liabilties to be = X

Target Current ration = 1.5

Target current asset will be = Present current asset + Increment

Target current liabilities will be = Present current Liabilities + Increment

Target Current ratio = Target Current asset / Target Current liabilites

1.5 = 3.5 +x/1.555556+x

1.5(1.5555556+x) = 3.5+x

2.333333+1.5x = 3.5+x

0.5x = 1.166667

x= 2.33333

Now in order to check the accuracy add the resukt to Present current asset and liabilities value to cacluate Current asset ration

Target Current ratio = 3.5+2.33333/1.555556+2.33333

Target current ratio = 1.5

Therefore Answer C is the correct Option

The company can take up short loan upto amounting to Mil $2.33333 of loan to fund excess inventory without condradicting the debt agreement

jeff jeffy answered 1 year ago

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