The Stewart Company has $2,371,500 in current assets and $948,600 in current liabilities. Its initial inventory...
The Stewart Company has $2,371,500 in current assets and $948,600 in current liabilities. Its initial inventory level is $616,590, 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? Round your answer to the nearest cent.
Homework Answers
| The current ratio shouldn't go below 2, it means that maximum reduction in current ratio up to 2 is acceptable, so the desired current ratio is 2 | |
| Let us assume X be the amount of short term debt (notes payable) which will be used to increase the inventory. | |
| Desired current ratio = ( Current assets + X ) / ( Current liabilities + X ) | |
| 2 = ( 2371500 + X ) / ( 948600 + X ) | |
| 2 * ( 948600 + X ) = 2371500 + X | |
| 1897200 + 2X = 2371500 + X | |
| 2X - X = 2371500 - 1897200 | |
| X = 2371500 - 1897200 | 474300.00 |
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