8. The Vernon Corp. has $3.1 million in current assets and $1.4 million in curre

Question

8. The Vernon Corp. has $3.1 million in current assets and $1.4 million in current liabilities. It has $600,000 in inventory. Vernon would like to borrow money in the form of notes payable to increase its inventory in preparation for an expansion into a new sales territory. How much money could it borrow before its current ratio drops below 1.8 (the lowest its bank is willing to see it go)? How much total inventory will it have it borrows that amount?   (6 pts.)

9. The Vernon Corp. (from above) also has $30 million in total debt on which it pays an interest rate of 8%. It has a profit margin of 5% on annual sales of $70 million. The bank does not lend to anyone with a TIE ratio below 5. Will the bank be willing to lend to Vernon? (6 pts.)

Explanation / Answer

Current ratio=current assets/current liability

=3.1mn/1.4mn=2.21

let borrow be x

then

1.8=3.1/1.4+x

x=$322,222,22

Total inventory it will have=600,000+322,222.22

=$922,222.22

9)TIE= EBIT/interest

interest=30mn*8%=2.4mn

EBIT=5%*70mn=$3.5

TIE=3.5/2.4

=1.46

since it is less than 5 bank will not lend

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