# Finance question

• May 31st 2008, 12:58 PM
bluejay
Finance question
The Mitchem Marble Company has a target current ratio of 2.0 but has experienced some difficulties financing its expanding sales in the past few months. The firm has a current ratio of 2.5 with current assets of $2.5 million. If Mitchem expands its receivables and and inventories using its short-term line of credit, how much additional short-term funding can it borrow before its current ration standard is reached? Current ration is defined by the book as current ration indicates a firm's liquidity, as measured by its liquid assets (current assets) relative to its liquid debt (short-term or current liabilities). So a current ration is: Current assets current ration = current liabilities I don't have any clue! Please help. • May 31st 2008, 01:21 PM janvdl Quote: Originally Posted by bluejay The Mitchem Marble Company has a target current ratio of 2.0 but has experienced some difficulties financing its expanding sales in the past few months. The firm has a current ratio of 2.5 with current assets of$2.5 million. If Mitchem expands its receivables and and inventories using its short-term line of credit, how much additional short-term funding can it borrow before its current ration standard is reached?

Current ration is defined by the book as current ration indicates a firm's liquidity, as measured by its liquid assets (current assets) relative to its liquid debt (short-term or current liabilities).

So a current ration is:
Current assets
current ration = current liabilities

I'm not sure I understand it correctly but I'll try to work using the formula.

$\displaystyle \frac{\text{Current Assets}}{\text{Current Ratio}} = \text{Current Liabilities}$

$\displaystyle \frac{2,500,000}{2.5} = \text{Current Liabilities}$

$\displaystyle 1,000,000 = \text{Current Liabilities}$

They want to reach their target current ratio of 2.0 if borrowing extra money.

Use the same formula.

$\displaystyle \frac{2,500,000}{2.0} = \text{Target Current Liabilities}$

$\displaystyle \frac{2,500,000}{2.0} = 1,250,000$

So they can borrow:
$\displaystyle 1,250,000 - 1,000,000 = 250,000$ extra, and reach their target current ratio of $\displaystyle 2.0$