Problem: Money Bank Coffee Company Ltd. (MBCCL) has $7 million in current assets which consists of cash $2 million, inventory of $1million and the balance in accounts receivable. MBCCL's current liabilities stand at $4 million. The company plans to increase its inventory, and it will raise additional short-term debt (that will show up as notes payable on the balance sheet) to purchase the inventory. Assume that the value of the remaining current assets will not change. The company's bond covenants require it to maintain a current ratio that is greater than or equal to 1.5.
(a) What is the maximum short-term loan that the company can borrowed to increase the inventory before it is restricted by these covenants?
(b) If $2 million of receivables were collected and paid to MBCCL's bank account, what would be the quick ratio after taking the loan?