The Nelson Company has $1,062,500 in current assets and $425,000 in current liab

Question

The Nelson Company has $1,062,500 in current assets and $425,000 in current liabilities. Its initial inventory level is $255,000, 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 1.5? 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. x

Explanation / Answer

Actual Current ratio = CA/CL = 1062500/425000 = 2.5 If Current ratio is pulled down by CL to 1.5 then 1062500/CL = 1.5 CL = 1062500/1.5 = $708333 CL at 2.5 current ratio = 425000 The Nelson Company will raise funds as additional notes payable without pushing its current ratio below 1.5 => 708333 - 425000 = 283333 Quick asset ratio after raised the maximum amount of short-term funds Assuming No Notes payable earlier(But this is not correct as in question said additional notes payable) =( CA - Stock )/ (CL - Notes payable) = (1062500 - 255000-283333) / (708333 - 283333) = 524167/425000 = 1.233 Assuming the earlier inventory is also increased by Notes payable then =( CA - Stock )/ (CL - Notes payable) = (1062500 - 255000-283333) / (708333 - 283333-255000) = 524167/170000 = 3.08

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