The Nelson Company has $1,050,000 in current assets and $500,000 in current liab
ID: 2735398 • Letter: T
Question
The Nelson Company has $1,050,000 in current assets and $500,000 in current liabilities. Its initial inventory level is $250,000, 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 1.6? Round your answer to the nearest cent.
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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.
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Explanation / Answer
A) Current ratio = current assets /current liabilities
=1050000/500000 =2.1.
let 'x ' be the amount that can be added to inventory and notes payable
1050000+x = (500000+x)*requiredcurrent ratio
1050000+x =(500000+x)*1.6
1050000+x=800000+1.6x
x=250000/0.6 = 416667
check
Revised CA = 1050000+416667 = 1466667
Revised cL = 500000+416667 = 916667
therefore Revised CR =1466667/916667 =1.60.
B) Quik ratio(After raising short term debt) = (current asset -inventory ) / Current liabilities
=(1466667-250000-416667)/916667
=800000/916667 = 0.87.
note
1. 250000 = initial inventory
2.416667= additionally added inventory.
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