M&M Inc. has an agreement with it banks that allow M&M to borrow money on a shor

Question

M&M Inc. has an agreement with it banks that allow M&M to borrow money on a short term basis to finance its inventories and accounts receivable. The agreement requires M&M to maintain a current ratio of 3.2 or higher. From the balance sheet, M&M has total assets of $1,850,000, current assets of $1,075,000, and total debts of $750,000 (consist of current liabilities of $225,000 and long-term debt of $525,000). Determine how much M&M could borrow this time to invest in inventory and accounts receivable without violating the terms of its borrowing agreement.

Explanation / Answer

let the amount that can be borrowed x

(1,075,000+x)/(225,000 + x) = 3.2

x = 161,363.64

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