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Math Help - Finance question

  1. #1
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    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.
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  2. #2
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    Quote Originally Posted by bluejay View Post
    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.
    I'm not sure I understand it correctly but I'll try to work using the formula.

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


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

    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.

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

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

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