Question 1191224: The current ratio of Precision Machine. Products is 3.8. If
the firm’s current assets are $570,000, what are its current
liabilities? To raise additional funds, what is the maximum
amount the company can borrow on a short-term basis if
the current ratio is to be no less than 2.6?
Answer by CPhill(1987)   (Show Source):
You can put this solution on YOUR website! Here's how to solve this problem:
**1. Calculate Current Liabilities:**
* Current Ratio = Current Assets / Current Liabilities
* 3.8 = $570,000 / Current Liabilities
* Current Liabilities = $570,000 / 3.8
* Current Liabilities = $150,000
**2. Calculate the Maximum Borrowing Amount:**
* We want the current ratio to be no less than 2.6 after borrowing. Let 'x' be the amount borrowed.
* New Current Assets = $570,000 + x
* New Current Liabilities = $150,000 + x
* New Current Ratio = (New Current Assets) / (New Current Liabilities)
* 2.6 = ($570,000 + x) / ($150,000 + x)
Now, solve for x:
* 2.6 * ($150,000 + x) = $570,000 + x
* $390,000 + 2.6x = $570,000 + x
* 1.6x = $180,000
* x = $112,500
Therefore, the maximum amount the company can borrow on a short-term basis is $112,500.
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