Question

What will be the firm's quick ratio after Nelson has raised the maximum amount of short-term funds? Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

Based on the short-term debt that Nelson raises, the firm's quick ratio will be 1.204.

What is the firm's quick ratio?

First, find the maximum amount of short-term funds that Nelson can raise?

Assuming this amount is x, we can find it with the current ratio formula:

Current ratio = Current assets / Current liabilities

2 = (1,260,000 + x) / ( 450,000 + x)

x = $360,000

The quick ratio would therefore be:

= ( New Current assets - New inventory) / New current liabilities

= ( (1,260,000 + 360,000) - (285,000 + 360,000) ) / (450,000 + 360,000)

= 1.204

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