(Liquidity Analysis)The King Carpet Company has $ 3 comma 110 comma 000 $3,110,0
ID: 2807497 • Letter: #
Question
(Liquidity Analysis)The King Carpet Company has $ 3 comma 110 comma 000 $3,110,000 in cash and a total of $ 11 comma 650 comma 000 $11,650,000 in current assets. The firm's current liabilities equal $ 6 comma 130 comma 000 $6,130,000 such that the firm's current ratio equals 1.9 1.9. The company's managers want to reduce the firm's cash holdings down to $ 1 comma 050 comma 000 $1,050,000 by paying $ 542 comma 000 $542,000 in cash to expand the firm's truck fleet and using $ 1 comma 518 comma 000 $1,518,000 in cash to retire a short-term note. If they carry this plan through, what will happen to the firm's current ratio?.
Explanation / Answer
Current Ratio = Current Assets / Current Liabilities
New current assets = old current assets - cash use in expanding fleet - cash to retire note = 11,650,000 - 542,000 - 1,518,000 = 9,590,000
New current liabilities = Old current liabilities - notes retired = 6,130,000 - 1,518,000 = 4,612,000
New Current Ratio = 4612/9590 = 2.08
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