National Co. has P5,000,000 in current assets, P3,000,000 in current liabilities, and its initial inventory level is P1,000,000. The company plans to increase its inventory, and it will raise additional short-term debt (that will show up as notes payable on the balance sheet) to purchase the inventory. Assume that the value of the remaining current assets will not change. The company’s bond covenants require it to maintain a current ratio that is greater than or equal to 1.5. What is the maximum amount that the company can increase its inventory before it is restricted by these covenants?
National Co. has P5,000,000 in current assets, P3,000,000 in current liabilities, and its initial inventory level is P1,000,000. The company plans to increase its inventory, and it will raise additional short-term debt (that will show up as notes payable on the balance sheet) to purchase the inventory. Assume that the value of the remaining current assets will not change. The company’s bond covenants require it to maintain a current ratio that is greater than or equal to 1.5. What is the maximum amount that the company can increase its inventory before it is restricted by these covenants?
Chapter3: Evaluation Of Financial Performance
Section: Chapter Questions
Problem 20P
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National Co. has P5,000,000 in current assets, P3,000,000 in current liabilities, and its initial inventory level is P1,000,000. The company plans to increase its inventory, and it will raise additional short-term debt (that will show up as notes payable on the balance sheet) to purchase the inventory. Assume that the value of the remaining current assets will not change. The company’s bond covenants require it to maintain a
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