2. THE AVERAGE COST OF THE CURRENT LIABILITIES IS 12% AND THE COST...
1.2. The average cost of the current liabilities is 12% and the cost of the long-term debt
is 8%. Below is the current balance sheet for Atlantic.
Current assets
$200,000
Current liabilities
$165,000
Fixed assets
100,000
Long-term debt
100,000
Total assets
$300,000
Equity
35,000
Total debt & equity
$300,000
Which one of the following alternatives will provide the resources to expand the
inventory while lowering the total cost of debt and satisfying the loan covenant?
a.
Increase both accounts payable and inventory by $25,000.
b.
Sell fixed assets with a book value of $20,000 for $25,000 and use the proceeds to
increase inventory.
c.
Borrow short-term funds of $25,000, and purchase inventory of $25,000.
d.
Collect $25,000 accounts receivable; use $10,000 to purchase inventory and use
the balance to reduce short-term debt.