Jake Company Borrowed $100,000 from Guaranty Trust Bank to Finance

Essay

Jake Company borrowed $100,000 from Guaranty Trust Bank to finance the purchase of new equipment. The loan contract provides for a 12 percent annual interest rate and states that the principal must be paid in full in ten years. The contract also requires that Jake maintains a current ratio of 1.5:1. Before Jake borrowed the $100,000, the company's current assets and current liabilities were $120,000 and $68,000 respectively.
If Jake invests $50,000 of the borrowed funds in equipment and keeps the rest as cash or short-term investment, what would be its current ratio?
a. 1.76
b. 2.50
c. 1.44
d. 3.24