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Halen Company’s CL=800,000and CA=1,840,000,and they have $300,000 worth of inventories
Halen is considering an expansion that would require a rapid increase in its inventories. The firm will issue short-term debt (notes payable) and use those funds to buy new inventories. Halen’s bond contracts stipulate that it must maintain a quick ratio of at least 1.40x, or else it is in default. How much new inventory can Halen raise before it violates its bond contracts?
A.550,000
B.416,667
C.300,000
D.820,000
E.185,714
If Halen follows through with this expansion plan, what will its new current ratio be?
A.1.89x
B.1.44x
C.1.95x
D.1.58x
E.1.69x
Thank You!!
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hehe
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Let N be the new inventories.
(CA - inventories)/CL = quick ratio
So 1,540,000/(800,000 + N) = 1.40
N = (1,540,000 - 1,120,000)/1.40 = $300,000
Answer C. 300,000
new current ratio = (1,840,000 + 300,000)/(800,000 + 300,000) = 1.95
Answer C. 1.95x
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