Sees Inc. has an agreement with it banks that allow Sees to borrow money on a sh
ID: 2653337 • Letter: S
Question
Sees Inc. has an agreement with it banks that allow Sees to borrow money on a short term basis to finance its inventories and accounts receivable. The agreement requires Sees to maintain a current ratio of 2.1 or higher and a debt ratio of 65% or lower. From the balance sheet, Sees has total assets of $1,375,000, current assets of $875,000, and total debts of $800,000 (consist of current liabilities of $195,750 and long-term debt of $604,250). Determine how much Sees could borrow this time to invest in inventory and accounts receivable without violating the terms of its borrowing agreement.
Explanation / Answer
Condition maintain a current ratio of 2.1 or higher
In this Condition he may borrow maximum
Current Asset/Current Liabilty = 2.1
(875000+x)/(195750+x) = 2.1
875000 +x = 411075+2.1 x
x = (875000-411075)/1.1
X = $ 421750
Second Condition a debt ratio of 65% or lower
In this Condition he may borrow maximum
Total Debt/Total Asset = 65%
(800000+x)/(1375000+x) = 65%
800000 + x = 893750 + 0.65x
X = 93750/0.35
X = 267857
Both Condition Combined than we can borrow maximum = 267857
Answer
Sees could borrow this time to invest in inventory and accounts receivable without violating the terms of its borrowing agreement is $ 267,857