Question

Question 3. (10 points total) (Liquidity analysis) Airspot Motors, Inc. has $2,433,200 in current assets and $869,000 in current liabilities. The company's managers want to increase the firm's inventory, which will be financed using short-term debt. How much can the firm increase its inventory without its current ratio falling below 2.1 (assuming all other assets and current liabilities remain constant)? (Round to one decimal place.)

Answer 1

The firm can increase its inventory without its current ratio falling below 2.1 by $553,000

2.1 times = $2,433,200 / $869,000

2.1 times = ($2,433,200 + y) / ($869,000 + y)

$2,433,200 + y = $1,824,900 + 2.1y

$608,300 = 1.1y

$553,000 = y