Question

The Stewart Company has $2,392,500 in current assets and $1,076,625 in current liabilities. Its initial inventory level is $526,350, and it will raise funds as additional notes payable and use them to increase inventory. How much can its short-term debt (notes payable) increase without pushing its current ratio below 2.0?

Answer 1

Answer:

the short-term debt can increase by 1,339,800 without pushing the current ratio below 2.

Explanation:

current ratio:

$\frac{current \: assets}{current \: liabilities}$

if we want a current ratio of at least 2 and current assets are 2,392,500 dollars then:

$\frac{2,392,500 + raised \: funds}{526,350 + raised \: funds} = 2$

the fund raised will also increase the current assets as thecompany will recieve cash.

$2,392,500 + raised \: funds = 2(526,350 + raised \: funds)$

$2,392,500 + raised \: funds = 1.052.700 + 2raised \: funds$

$2,392,500 - 1,052,700 = 2raised \: funds - raised \: funds$

raised funds: 1,339,800

checking:

(2,392,500+ 1,339,800) / (526,350 + 1,339,800)

3,732,300‬  / 1,866,150 = 2