Federal Express Corporation, a world leader in express mail services, reported the following in its 1994 financial statements (dollars in millions). 1994 Current assets $1,762 Current liabilities 1,536 The company’s long-term debt contains restrictive covenants that require the maintenance of certain financial ratios. Assume that these covenants require that the company’s current ratio be at least 1.10:1.00. REQUIRED:

a. What additional dollar value of current liabilities could have been reported as of December 31, 1994, without violating the debt covenant?

b. List several current liabilities that management may have been able to control to ensure at year-end that the covenant was not violated, and explain how these liabilities could have been controlled.

c. Explain what could happen if the company violated the covenant.

d. Assume that at the end of 1994, Federal Express considered a $600 million inventory pur¬ chase. Assume also that the company has the necessary cash. Should the company pay cash or purchase the inventory on account, and why? Support your answer with calculations.