Question

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 issuing a 3-year bond. What level of inventories can the firm carry without its current ratio falling below 1.5?

Answer 1

$ 1.05 million

Working;

Issuance of 3-Year bond to finance the purchase of inventory will not alter current liabilities as this issuance is long term liability.

Current ratio

=

Current assets / Current Liabilities

1.5

=

Current assets / 3.7

Current assets

=

$       5.55

Inventory is current asset.So, increase of inventory should maintain the level of current ratio.

Required Current assets

$       5.55

Less: Existing current assets

$       4.50

Required additional assets(Inventory)

$       1.05

Thus,

Firm should issue inventory in such a way so that issued inventory plus existing current asset should be $ 5.5 million.