experience in product development of handbags and small leather goods. The intent was for the designer to initially work with the company?s innovation team to introduce a gift with purchase (GWP): a logo wristlet purse that can accommodate a Smartphone. This GWP will be offered as a limited edition during the holiday season and customers or recipients will be encouraged through social media to participate in a survey regarding the product to determine future potential demand for handbags and other small leather goods bearing the Felicia & Fred logo.
The potential inclusion of handbags as part of the company?s product will require significant addition to the total value of Felicia & Fred?s working capital. The entire mix of assets and liabilities as part of the balance sheet might change.
Consider the following:
In order to maintain the company?s debt covenants, it must maintain a current ratio of 1.5. Its current ratio is presently 1.75 and has been maintained at that level for some time. What happens to a company?s current ratio if it takes on additional short-term debt or accounts payable to fund current assets when the current ratio is greater than one?? Or Less than one??
Given your consideration of the part 2 result, should the company fund a working capital increase with short-term debt or long-term debt?
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