Question

The RRR Company has a target current ratio of 3.2. Presently, the current ratio is 4.1 based on current assets of $12,956,000. If RRR expands its fixed assets using short-term liabilities (maturities less than one year), how much additional funding can it obtain before its target current ratio is reached

Answer 1

$888,750

Step-by-step explanation:

The amount of additional funding required is the excess of revised current liabilities based on the current ratio is 3.2 compared with the current liabilities based on the current ratio of 4.1(the one we have currently).

Current ratio=current assets/current liabilities

Current situation:

current ratio=4.1

current assets=$12,956,000

current liabilities=unknown(let us assume it is X)

4.1=$12,956,000/X

4.1*X=$12,956,000

X=$12,956,000/4.1

X=$3,160,000

Revised situation:

target current ratio=3.2

current assets=$12,956,000

current liabilities=unknown(let us assume it is Y)

3.2=$12,956,000/Y

3.2*Y=$12,956,000

Y=$12,956,000/3.2

Y=$4,048,750

additional funding=$4,048,750-$3,160,000

additional funding increase=$888,750