- Loose truck Inc has cash of 100,000, accounts receivable of 500,000, and inventory of 400,000. The firm has accounts payable of 200,000, notes payable of 300,000 and long term debt of 200,000. The firm wishes to increase its current ratio to 2.4. How much would current assets or current liabilities need to change in order to increase the current ratio to 2.4? Current Assets Current Liabilities A. +200,000 -83,333 B. +200,000 +83,333 C. +680,000 -83,333 D. +680,000 +83,333 2. Use the following data for a company leasing a machine with a capital lease: a. The lease period is ten years b. The lease payments are $2,980.59 at the end of each year c. The firm will own the asset at the end of the lease term but the salvage value will be negligible. d. 8.5% is the firm’s incremental borrowing rate. e. 8% is the implicit lease rate If the company uses straight line depreciation, the first year’s reported lease expense is: A. 2,635 B. 2,980 C. 3,200 D. 3,600
- 680,000, -283,333 (not -83,333 ) 2. 2,980
I can’t seem to work out #1 - current ratio = CA/CL For CA i get 1,000,000 (A/R + cash + inventory) For CL I get 500,000 (A/P + N/P; long term debt isn’t a current liability) So I get a ratio of 2 initially, but I can’t figure out with the numbers given how to get 2.4 Also, can someone explain #2?
Actually i made a mistake, answer #1 is A 1,000,000=2.4(500,000+X) which mean that 500,000+X=1,000,000/2.4 500,000+X=416,666.67 which means that X= -83,333 1,000,000 +x=2.4(500,000) which means 1,000,000+x=1,200,000 so X=200,000 I’m not too sure about #2
I’ll post the answers per Schweser in a few. I am posting these questions word for word from the sample questions book, I couldn’t work it even though they seem simple. I got B for #2, but the book marks it incorrect. I’ll get back on the exact answers shortly.
I thought that both CA and CL were changing by an amount at the same time? So for example I tried out the new ratio to be 1200000/416,666 = 2.8. But the ratios do work if just CA change by the given amount or if just CL changes by the amount given.
According to Schweser the answers are: 1. A 2. D I’m totally lost as to how the book got to these answers. Maybe they’re part of the errata?
Any explanations for the answers given in the book? Question 1 would make any reasonable person assume that both CL and CA are changing at the same time…and none of the answers work if that’s the case
- current ratio --> 1m/500k=2.0. now was just try to plug in the different answers by adding to the CA and subtracting from the CL. you can also do math which shouldn’t be too complicated. the answer is A. 2. use your calculator to get the PV of the capital lease using the lowest yield (8%). now take 8%*PV=interest expense. add this to the depreciation expense and you’ll get the total expense for the first year.
js1234 Wrote: ------------------------------------------------------- > 1. current ratio --> 1m/500k=2.0. > now was just try to plug in the different answers > by adding to the CA and subtracting from the CL. > you can also do math which shouldn’t be too > complicated. the answer is A. > But when you plug in the numbers for A you get 1,200,000/416,667 = 2.87
yo don’t plug both. How much would current assets ***OR*** current liabilities need to change in order to increase the current ratio to 2.4?
^ ahh, tricky tricky wording. thanks!
js1234 Wrote: ------------------------------------------------------- > yo don’t plug both. > > How much would current assets ***OR*** current > liabilities need to change in order to increase > the current ratio to 2.4? Ahhh. . . good pick up!