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Chapter 4, Problem 19P
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### Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

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Section
BuyFindarrow_forward

### Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

# CURRENT RATIO The Stewart Company has $2,392,500 in current assets and$1,076,625 in current liabilities. Its initial inventory level is $526,350, and it will raise funds as additional notes payable and use them to increase inventory. How much can its short-term debt (notes payable) increase without pushing its current ratio below 2.0? Summary Introduction To identify: The increase in short-term debt without pushing its current ratio below 2. Current Ratio: The current ratio is a part of liquidity ratio, which reflects the capability of the company to pay back its short-term debts. It is calculated based on the current assets and current liabilities that a company posses in an accounting period. Current Assets: The assets of the company, which needs to be converted into cash in less than a year or during current accounting period, are called current assets. Current Liabilities: The debts or liabilities that need be paid in less than one year or during the current accounting period is called current liabilities. Explanation Given, Current asset is$2,918,850 (working note).

Current liabilities are $1,076,625. Formula to calculate minimum current ratio is, MinimumĀ CurrentĀ Ratio=CurrentĀ Assets+NotesĀ PayableCurrentĀ Liabilities+NotesĀ Payable Substitute 2 times for minimum current ratio,$2,918,850 for current assets and $1,076,625 for current liabilities. 2Ā times=$2,918,850+NotesĀ Payable$1,076,625+NotesĀ Payable$2,153,250+2Ā NotesĀ Payable=$2,918,850+NotesĀ Payable2NotesĀ PayableāNotesĀ Payable=$2,918,850ā$2,153,250NotesĀ Payable=$765,600

Thus, the short-term debt is increased by \$765,600

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