Question

The Nelson Company has $1,620,000 in current assets and $600,000 in current liabilities. Its initial inventory level is $480,000, 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 1.7? Round your answer to the nearest cent. $ What will be the firm's quick ratio after Nelson has raised the maximum amount of short-term funds? Round your answer to two decimal places.

Answer 1

Information provided:

Current assets= $1,620,000

Current liabilities= $600,000

Initial inventory level= $480,000

Let the additional notes payable be N which is invested in inventory.

Current Ratio= Current Assets/ Current Liabilities

1.7= $1,620,000 + N/ $600,000 + N

N= $867,142.86.

Therefore, Nelson’s short term debt can increase by $867,142.86 without pushing its current ratio below 1.7.

New inventory= $480,000 + $867,142.86 = $1,347,142.86

New current assets= $1,620,000 + $867,142.86 = $2,487,142.86.

New current liabilities= $600,000 + $867,142.86 = $1,467,142.86

Quick Ratio= $2,487,142.86 - $1,347,142.86/ $1,467,142.86

                      = $1,140,000/ $1,467,142.86

                      = 0.77700.78.

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