Show your work on all calculations Wolfskill Holdings, Inc. currently has $2,145

Question

Show your work on all calculations Wolfskill Holdings, Inc. currently has $2,145,000 in current assets, and $858,000 in current liabilities. The Chief Operating Officer (Coo) wants to increase the level of inventory that the company carries. However, the Chief Financial Officer (CFO) is concerned about how that will affect the company's liquidity. The company will purchase the new inventory using a short term loan from their bank. 1. What is the company's Current Ratio? How much new inventory can the company purchase without causing its Current Ratio to drop below 2.0? A few notes: a. b. i. ii. The amount of inventory added will be equal to the amount of STN added. The new Current Ratio will be (Current Assets plus new inventory) divided by (Current Liabilities plus new STN)

Explanation / Answer

a) Current Assets $2145000 Current Liabilities $858000 Current Ratio= Current Assets / Current Liabilities $2145000/$858000 2.5 2.5 Times b) New Current Ratio = 2 times New Inventory purchase would increase Short Term Loan from Bank New Current Ratio = Current Assets + New Inventory /Current Liabilities + Short Term Loan Let assume New Inventory = Short Term Loan = x 2 = $2145000+x/$858000+x 2($858000+x)=$2145000+x $1716000+2x=$2145000+x 2145000-1716000 = 2x-x 2145000-1716000 = x $429000 New Inventory and Short Term Loan from Bank should be $429000 each to maintain Current Ratio of 2

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