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

question 29

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 $80,000 of the borrowed funds in equipment and keeps the rest as cash or short-term investment, what is the maximum amount of current liabilities it could have without violating the debt contract?
a. $93,333
b. $133,333
c. $146,667
d. $102,000

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Definitions:

Conformity

The act of matching attitudes, beliefs, and behaviors to group norms, policies, or societal expectations.

Longitudinal Study

A research method that involves repeated observations of the same variables (e.g., people) over short or long periods of time to detect patterns, changes, and possibly predict future developments.

Genetic Factors

The aspects of an individual's genes or heredity that influence their characteristics, including physical traits, behaviors, and susceptibilities to certain conditions.

Primacy

The tendency to remember and give more importance to the first information we encounter about something, over data that comes later.