Question: A firm has $140,000 in current assets, which consists of $ 35,000 in A/R (account recebale ), $55,000 in inventory and remainder in cash. The firm has short-term liabilities of $44,000
Assume the firm wants to increase inventory by raising money through issuing short-term notes. According to company records, current loan covenants in place prohibit the current ratio from dropping below 2.30. How much could the firm raise and invest in inventory without decreasing its current ratio to below 2.30?
(Hint: the transaction affects both the numerator and denominator.)