Airport Accessories (AA) has several loans outstanding with a local bank. The loan contract contains an agreement that AA must maintain a current ratio of at least 0.90. Micah, the assistant controller, estimates that the year-end current assets and current liabilities will be $2,100,000 and $2,400,000, respectively. These estimates provide a current ratio of only 0.875. Violation of the debt agreement will increase AAs borrowing costs because the loans will be renegotiated at higher interest rates. Micah proposes that AA purchase inventory of $600,000 on credit before year-end. This will cause both current assets and current liabilities to increase by the same amount, but the current ratio will increase to 0.90. The extra $600,000 in inventory will be used over the next year. However, the purchase will cause warehousing costs and financing costs to increase. What to Do Explain what is the current ratio? What does it try to measure? Explain what is the debt covenant? Watch the below video/Google and find what other provisions would be included in the debt covenant? Why does the bank (through debt covenant) requires the current ratio to be at a certain percentage? Micah is concerned about the ethics of his proposal. What do you think?