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 shortminusterm debt. How much inventory can Baker purchase without violating its debt agreement if their total current assets equal​ $15 million?

Answer 1

$1.67 Million

Step-by-step explanation:

Current asset = 15 Million

Current liabiltiy = 15 Million/3

= 5 Million

Let the inventory X can be purchased with short term debt without violation

per current ratio requirement

(15 + x)/5+x = 2.5

15 + x = 12.5 + 2.5x

2.5 = 1.5x

x = $1.67 Million

Therefore, $1.67 Million inventory can Baker purchase without violating its debt agreement if their total current assets equal​ $15 million