Question

Baker corp. Is required by a debt agreement to maintain a current ratio of at least​ 2.5, and​ baker's current ratio now is 3. Baker wants to purchase additional inventory for its upcoming christmas​ season, and will pay for the inventory with shortminus−term debt. How much inventory can baker purchase without violating its debt agreement if their total current assets equal​ $15 million?

Answer 1

Calculation of amount of additional inventory that baker can purchase without violating its debt agreement;

It is given that baker's current ratio now is 3 and their total current assets equal $15 million. We can calculate Current liabilities amount as follows;

Current liabilities = Current assets/ Current Ratio = $15 million /3 = $5 Million

Now we are given that Baker corp. Is required by a debt agreement to maintain a current ratio of at least 2.5. Let’s Say the additional amount of inventory be X, then

($15 million +X) / ($5 Million + X) = 2.5

Now Solving this equation for X, we get X = 1.66667

Hence, we can say that amount of additional inventory that baker can purchase without violating its debt agreement is $1,666,667