Management of a company does not want to violate a workingcapital restriction contained in its bond indenture. If the firm'scurrent ratio falls below 2 to 1, technically it will be defaulted.The firm's current ratio is now 2.4 to 1. if current liabilities are P200 million, the maximum new commercial paper that can beissued to finance inventory expansion is Pmillion

Lets understand the basics. Current ratio compares the current asset with the current liabilities.…

Answered: Management of a company does not want…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter3: Evaluation Of Financial Performance

Section: Chapter Questions

Problem 8P

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Similar questions

If Bulldogs’ current liabilities are P1,300,000, the firm’s A. Acid-test ratio will be constant if a payment of P100,000 cash is used to acquire inventory. B. Acid-test ratio will decrease if a payment of P100,000 cash is used to acquire inventory. C.current ratio will decline if a payment of P100,000 cash is used to pay P100,000 of current liabilities. D. current ratio will remain constant if a payment of P100,000 cash is used to pay P100,000 of current liabilities.
1. Sexy Inc. has P5 million in current assets, P3 million in current liabilities, and its initial inventory is P1 million. The company plans to increase its inventory, and it will raise additional short-term debt (that will show up as notes payable on the balance sheet) to purchase the inventory. Assume that the value of the remaining current assets will not change. The company's bond covenants require it to maintain a current ratio that is greater than or equal to 1.5. What is the maximum amount that the company can increase its inventory before it is restricted by these covenants? A. P500,000 C. P1,330,000 E. P2,330 B. P1,000,000 D. P1,660,000
The firm's current ratio now is 2.1. The firm plans to acquire additional inventory to meet a surge in the demand for its products and will pay for the inventory with short-term debt. How much inventory can the firm purchase without violating its debt agreement, to maintain current ratio of 1.75 if their total current assets equal $3.5 million? $0 O $777,777 O $437.500 O $1 million
The firm's current ratio is 2.1. the firm plans to acquire additional inventory to meet a surge in the demand for its products and will pay for the inventory with short-term debt. How much inventory can the firm purchase without violating its debt agreement, to maintain the current ratio of 1.75 if their total current assets equal $3.5 million? a. 777,777 b. 437,500 c. 1 million d. 0
Fresh Products Co. has P5 million in current assets, P3 million in current liabilities, and its initial inventory level is P1 million. The company plans to increase its inventory, and it will raise additional short-term debt (that will show up as notes payable on the balance sheet) to purchase the inventory. Assume that the value of the remaining current assets will not change. The company’s bond covenants require it to maintain a current ratio that is greater than or equal to 1.5. What is the maximum amount that the company can increase its inventory before it is restricted by these covenants?
The manager of a firm at t=0 has to decide whether to liquidate or to continue. If he decides to continue in t=1, the value of the firm assets will be Va= €140 million assuming business recovers. Nevertheless, the most likely scenario ((1-p) = 85%) is that the company sales will continue declining. Then, company assets will be valued only at Vẞ = €78 million. At what debt value, we see an inefficiency case because Managers' Aversion to Liquidation. a. $60 million O b. None * C. $100 million d. $80 million Your answer is incorrect. The correct answer is: $100 million
Suppose Tefco Corp. has a value of $154 million if it continues to operate, but has outstanding debt of $176 million that is now due. If the firm declares bankruptcy, bankruptcy costs will equal $21 million, and the remaining $133 million will go to creditors. Instead of declaring bankruptcy, management proposes to exchange the firm's debt for a fraction of its equity in a workout. What is the minimum fraction of the firm's equity that management would need to offer to creditors for the workout to be successful? Tefco could offer its creditors % of the firm in a workout. (Round to one decimal place.)
The Nelson Company has $1,312,500 in current assets and $525,000 in current liabilities. Its initial inventory level is $375,000, and it will raise fundsas additional notes payable and use them to increase inventory. How muchcan Nelson’s short-term debt (notes payable) increase without pushing itscurrent ratio below 2.0? What will be the firm’s quick ratio after Nelson hasraised the maximum amount of short-term funds?
Which of the following actions can a firm take to increase its current ratio? A. Issue short-term debt and use the proceeds to buy back long-term debt with a maturity of more than one year. B. Reduce the company's days sales outstanding to the industry average and use the resulting cash savings to purchase plant and equipment. C. Use cash to purchase additional inventory. D. Statements a and b are correct. E. None of the statements above is correct.
The Supple Hardware Company has $2,000,000 in current assets and $600,000 in current liabilities. Its initial inventory level is $450,000, and it will raise funds as additional short-term notes payable and use them to increase inventory. How much can Supple's current liabilities (notes payable) increase without violating a contractual agreement (the debt covenant) with its bondholders that requires a minimum current ratio of 2 to 1? Compute the dollar value of 1) inventory, 2) total current assets, and 3) total current liabilities after the maximum new financing has been obtained and the funds allocated.
Suppose Tefco Corp. has a value of $131 million if it continues to operate, but has outstanding debt of $160 million that is now due. If the firm declares bankruptcy, bankruptcy costs will equal $22 million, and the remaining $109 million will go to creditors. Instead of declaring bankruptcy, management proposes to exchange the firm's debt for a fraction of its equity in a workout. What is the minimum fraction of the firm's equity that management would need to offer to creditors for the workout to be successful? Tefco could offer its creditors% of the firm in a workout. (Round to one decimal place.) C
The Nelson Company has $1,358,000 in current assets and $485,000 in current liabilities. Its initial inventory level is $360,000, and it will raise funds as additional notes payable and use them to increase inventory. How much can Nelson's short-term debt (notes payable) increase without pushing its current ratio below 1.8? Do not round intermediate calculations. Round your answer to the nearest dollar. $ What will be the firm's quick ratio after Nelson has raised the maximum amount of short-term funds? Do not round intermediate calculations. Round your answer to two decimal places.

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