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.