The Nelson Company has $1,750,000 in current assets and $700,000 in current liabilities. Its initial inventory level is $490,000, 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 1.9? 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.

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funmilaciousfunmie78 funmilaciousfunmie78 · Answer 1 · 2020-06-25T05:08:20+02:00

Answer:

(a) Short-term debt can increase by a maximum of $466,666.67 without pushing its current ratio below 1.9

(b) The firm's quick ratio after Nelson has raised the maximum amount of short-term funds is 1.34

Explanation:

Current assets = $1,750,000

Current liabilities = $700,000

Initial inventory level = $490,000

Current ratio = Current assets ÷ Current liabilities

= $1,750,000 ÷ $700,000 = 2.5

1.9 = (Current assets + [tex]\Delta{NP[/tex]) ÷ (Current liabilities + [tex]\Delta{NP[/tex])

1.9 = ($1,750,000 + [tex]\Delta{NP[/tex]) ÷ ($700,000 + [tex]\Delta{NP[/tex])

1.9 × ($700,000 + [tex]\Delta{NP[/tex]) = ($1,750,000 + [tex]\Delta{NP[/tex])

$1,330,000 + [tex]1.9\Delta{NP[/tex] = $1,750,000 + [tex]\Delta{NP[/tex]

[tex]0.9\Delta{NP[/tex] = $1,750,000 - $1,330,000

[tex]\Delta{NP[/tex] = $466,666.67

Short-term debt can increase by a maximum of $466,666.67 without pushing its current ratio below 1.9

Quick ratio = (Current assets - Inventories) ÷ Current liabilities

= $937,500 ÷ $700,000

= 1.34