Answer:
The level of inventories the firm can carry without its current ratio falling below 2.1 is 347,909
Explanation:
Current Ratio = Current Asset (CA) / Current Liabilities (CL)
Taking into account the formula of the current ratio, to the amount of current assets and current liabilities must add an amount such that the result is 2.1.
(2,132,000 + x) / (833,000 + x) = 2.1
(2,132,000 + x) = 2.1 * (833,000 + x)
2,132,000 + x = (2.1* 833,000) + (2.1 x)
2,132,000 + x = 1,749,300 + 2.1 x
2,132,000 - 1,749,300 = 2.1 x – x
382,700 = 1.1 x
382,700 / 1.1 = x
x = 347,909
So the maximum that should be borrowed to buy inventory is $347,909.
