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.

Explanation / Answer

Suppose Nelson's short-term debt (notes payable) increase is X, then

Current ratio = (1062500 + X) / (425000 + X) = 1.5

solving it for X, we get

X = $850000

So, Nelson's short-term debt (notes payable) increase is $850000 and current assets= 1912500/1275000=1.5

After above increase, the total inventory = $255000 + $850000 = $1105000

Quick assets = 1912500 - 1105000 = $807500

After Nelson has raised the maximum amount of short-term funds, the Quick ratio = $807500 / $1275000 = 0.63

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