Answer:
A) Short-term debt increase = 5,625,000
B) Quick Ratio= 0.24
Explanation:
a) Current Ratio = Current Asset (CA) / Current Liabilities (CL)
Acording to the current ratio formula, to calculate the amount of short-term debt increase, to the amount of current assets and current liabilities we must add an amount such that the result is 1.2.
(1,875,000 + x) / (625,000 + x) = 1.2
(1,875,000 + x) = 1.2 * (625,000 + x)
1,875,000 + x = (1.2* 625,000) + (1.2 x)
1,875,000 + x = 750,000 + 1.2 x
1,875,000 - 750,000 = 1.2 x – x
1,125,000 = 0.2 x
1,125,000 / 0.2 = x
x = 5,625,000
So the maximum that should be borrowed to buy inventory is 5,625,000
b) Quick Ratio = (Current Asset (CA) – Inventory (I) – Prepaid Expenses (PE))/Current Liabilities (CL)
For the Current Asset, the taken is 1,500,000 (1,875,000 - 375,000) because we don't include the original inventory and the maximum increase. For the current liabilities, we take 6,250,000 (625,000 + 5,625,000) that is the original amount add to the maximum increase
Quick Ratio = 1,500,000/ 6,250,000
Quick Ratio= 0.24
