Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

RC Company has several loans outstanding with a local bank. The debt agreements all contain a covenant stipulating that Raintree must maintain a current ratio

image text in transcribed
image text in transcribed
RC Company has several loans outstanding with a local bank. The debt agreements all contain a covenant stipulating that Raintree must maintain a current ratio of at least 0.9. The company estimates that if nothing is done the 2020 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 Raintree's borrowing costs as the loans are renegotiated at higher rates. The company has the following options that may or may not affect the current ratio. Option 1. Provide incentives to one of our customers who borrowed a large amount to pay up quickly. Option 2. Purchase a large amount of office supplies with cash Option 3. Pay a large dividend to shareholders. Option 4. Ask shareholders to make a large additional investment to paid in capital. Option 5. Borrow a large amount of additional cash by signing a three-year note. Option 6. Purchase a large amount of inventory on credit before year-end. Requirement A. 1 point. Which of these options will improve the company's current ratio? 23 Requirement B. 1 point for exceptional work, must get requirement I correct to get credit; default for good work 0.75 points). Discuss the benefits and drawbacks of each of the options that will improve the company's current ratio (only discuss alternatives identified in requirement A that will improve the current ratio). Requirement C. Which option would you recommend to the company and why? You may also suggest additional options not mentioned above. (Credit based on how clearly and convincingly Requirement B. 1 point for exceptional work; must get requirement 1 correct to get credit; default for good work 0.75 points). Discuss the benefits and drawbacks of each of the options that will improve the company's current ratio (only discuss alternatives identified in requirement A that will improve the current ratio). Requirement C. Which option would you recommend to the company and why? You may also suggest additional options not mentioned above. (Credit based on how clearly and convincingly you make your case, not based on length; 1 point for exceptional work; default 0.75 points for good work)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Sustainability Performance And Reporting

Authors: Irene M. Herremans

1st Edition

1951527208, 9781951527204

More Books

Students also viewed these Accounting questions