The Nelson Company has $1,350,000 in current assets and $500,000 in current liab

Question

The Nelson Company has $1,350,000 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 1.3? 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

Answer:

Let the increase in short term debt be x. Then increased total current assets and total current liabilities will be $1,350,000 and $500,000 + x respectively.

Now, $1,350,000 / $500,000 + x = 1.3

650,000 + 1.3x = 1,350,000

1.3 x = 700,000

x = $ 538,462

Total current liabilities = $ 538,462 + $500,000 = $ 1,038,462

Quick ratio after that = Current Assets - Inventory - Prepaid expense / Current Liabilities

= $1,350,000 - $ 250,000 /$ 1,038,462 = 1.06 (Answer)

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