Question

Baker Corp. is required by a debt agreement to maintain a current ratio of at least​ 2.5, and​ Baker's current ratio now is 3. Baker wants to purchase additional inventory for its upcoming Christmas​ season, and will pay for the inventory with shortminusterm debt. How much inventory can Baker purchase without violating its debt agreement if their total current assets equal​ $15 million?

Answer 1

Answer:

$1.67 Million

Explanation:

Current asset = 15 Million    

Current liabiltiy = 15 Million/3

                          = 5 Million    

Let the inventory X can be purchased with short term debt without violation

per current ratio requirement    

(15 + x)/5+x = 2.5    

       15 + x  = 12.5 + 2.5x    

            2.5 = 1.5x    

               x = $1.67 Million

Therefore, $1.67 Million inventory can Baker purchase without violating its debt agreement if their total current assets equal​ $15 million