Baker corp. is required by a debt agreement to maintain a current ratio of at least 2.5, and baker's current ratio now is 3. baker wants to purchase additional inventory for its upcoming christmas season, and will pay for the inventory with shortminus−term debt. how much inventory can baker purchase without violating its debt agreement if their total current assets equal $15 million?

Calculation of amount of additional inventory that baker can purchase without violating its debt agreement;

It is given that baker's current ratio now is 3 and their total current assets equal $15 million. We can calculate Current liabilities amount as follows;

Current liabilities = Current assets/ Current Ratio = $15 million /3 = $5 Million

Now we are given that Baker corp. Is required by a debt agreement to maintain a current ratio of at least 2.5. Let’s Say the additional amount of inventory be X, then

($15 million +X) / ($5 Million + X) = 2.5

Now Solving this equation for X, we get X = 1.66667

Hence, we can say that amount of additional inventory that baker can purchase without violating its debt agreement is $1,666,667

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