Ray\'s Tool and Supply Company of Austin, Texas, has beenexpanding its level of

Question

Ray's Tool and Supply Company of Austin, Texas, has beenexpanding its level of operation for the past two years. The firm'ssales have grown rapidly as a result of the expansion in the Austineconomy. However, Ray's is a privately held company, and the onlysource of available funds it has is a line of credit with thefirm's bank. The company needs to expand its inventories to meetthe needs of its growing customer base but also wishes to maintaina current ratio of at least 3. If Ray's current assets are $6million, and its current ratio is now 4, how much can it expand itsinventories (fmancing the expansion with its line or credit) beforethe target current ratio is violated?

Explanation / Answer

Given current ratio =4

Current assets /current liabilities = 6 / current liabilities = 4

So current liabilities = 1.5 million$

Desired current ratio =3

So current assets of 4.5million $ iS enough where as the current inventory level is 6million$ which is a sufficient factor and no expansion is needed.

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