1.) The Nelson Company has $1,687,500 in current assets and $675,000 in current
ID: 2745488 • Letter: 1
Question
1.) The Nelson Company has $1,687,500 in current assets and $675,000 in current liabilities. Its initial inventory level is $405,000, 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 2.2? 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.
______________
2.) The Morris Corporation has $400,000 of debt outstanding, and it pays an interest rate of 8% annually. Morris's annual sales are $2 million, its average tax rate is 30%, and its net profit margin on sales is 8%. If the company does not maintain a TIE ratio of at least 3 to 1, then its bank will refuse to renew the loan and bankruptcy will result. What is Morris's TIE ratio? Round intermediate calculations to two decimal places. Round your answer to two decimal places.
Explanation / Answer
1)
Current ratio = current assets / current liabilities
2.2 =(1687500+x)/(675000+x)
2.2*(675000+x)=1687500+x
2.2x-x=1687500-1485000
x=202500/1.2=168750
Quick ratio= (current assets – inventory)/current liabilities
= (1687500-405000-168750)/(675000+168750)
= (1,237,500)/843,750 = 1.467
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