Liquidity Analysis And Current Ratio Management For Advanced Autoparts

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Liquidity Analysis and Current Ratio Management for AdvancedAutoparts4–24. (Liquidity analysis)When firms enter into loan agreements with their bank it is verycommon for the agreement to have a restriction on the minimum current ratio the firmhasto maintain. So, it is important that the firm be aware of the effects of their decisionson the current ratio. Consider the situation of Advanced Autoparts (AAP) in 2009. Thefirm had total current assets of $1,807,626,000 and current liabilities of $1,364,994,000.a.What is the firm’s current ratio?b.If the firm were to expand its investment in inventory and finance the expansion byincreasing accounts payable, how much could they increase their inventory withoutreducing the current ratio below 1.2?c.If the company needed to raise its current ratio to 1.5 by reducing its investment incurrent assets and simultaneously reducing accounts payable and short-term debt,how much would it have to reduce current assets to accomplish this goal?4-24 Answer:a.The current ratio is1.32.b.The firm can increase inventory by$848,166,000without dropping the currentratio below 1.2.c.To raise the current ratio to 1.5, the firm needs to reduce current assets by$479,730,000.

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