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 the entire $100,000 of the borrowed funds in equipment, what is the maximum amount of current liabilities it could have without violating the debt contract?
a. $146,667
b. $102,000
c. $80,000
d. $125,333