Darrington and Darling borrowed $100,000 from Commercial Financing to finance the purchase of fixed assets. The loan contract provides for a 12 percent annual interest rate and states that the principal must be paid in full in ten years. The contract also requires that Darrington and Darling maintain a current ratio of 1.5:1. Before Darrington and Darling borrowed the $100,000, the company’s current assets and current liabilities were S130,000 and $80,000, respectively.

a. Compute the company’s current ratio if it invests $50,000 of the borrowed funds in fixed assets and keeps the rest as cash or short-term investments. To what dollar amount can current liabilities grow before the company violates the debt contract?

b. Compute the company’s current ration if it invests $80,000 of the borrowed funds in fixed assets and keeps the rest as cash or short-term investments. To what dollar amount can current liabilities grow before the company violates the debt contract?

c. Compute the company’s current ratio if it invests the entire $100,000 of the borrowed funds in fixed assets. To what dollar amount can current liabilities grow before the company violates the debt contract?