Question

Q1) Firm XXX has $4.5 million in current assets and 3.7 million in current liabilities. The firm wants to increase its inventory, which will be financed by a short term note with the bank. What level of inventories can the firm carry without its current ratio falling below 1.1?

Answer 1

The firm can increase its inventory without its current ratio falling below 1.1 by

1.1 times = $4,500,000 / $3,700,000

1.1 times = ($4,500,000 + y) / ($3,700,000 + y)

$4,500,000 + y = $4,070,000 + 1.1y

$430,000 = 0.1y

y = $4,300,000