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Problem 2 : The Salem Corporation has current assets of $ 3 . 0 million. Of this total, $ 1 . 0 million is inventory,
Problem :
The Salem Corporation has current assets of $ million. Of this total, $ million is inventory, $
million is cash, $ million is accounts receivable, and the balance is marketable securities Salem has
$ million in current liabilities.
a What are the current and the quick ratios for Salem?
b If Salem takes $ million in cash and pays off $ million of current liabilities, what happens
to its current and quick ratios? What happens to its real liquidity?
c If Salem sells $ million of its accounts receivable to a bank and uses the proceeds to pay off
shortterm debt obligations, what happens to its current and quick ratios?
d If Salem sells $ million in new stock and places the proceeds in marketable securities what
happens to its current and quick ratios?
e What do these examples illustrate about the current and quick ratios?
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