Question

The Nelson Company has $1,275,000 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.

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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.

Answer 1

Ans a)
	Current assets		1,275,000
	current liabilities		510,000
	Existing current ratio =	2.5
	Lets assume increase in notes payable = x
	Current assets		1275000+x
	current liabilities		510000+x
	we will have below equatio
	1275000+x=		1.8(510000+x)
	1275000+x=		918000+1.8x
	x=		446250
	Threfore increase in Nelson's short-term debt=	446,250
ans b)	Quick ratio =
	Quick ratio = (Current asset - inventory)/Current liabilities
	quick ratio = (1275000-355,000)/(510,000+446250)
		0.96
	ans =	0.96