Rebecca Ltd is a glove manufacturer in Melbourne. The managers decide to obtain an automated machine worth $1,000,000. As a result of obtaining such a machine, there will be a $100,000 reduction in total expense. The managers are considering the following options:

• Option 1: Purchase the machine with existing cash at the business bank account, assuming that Rebecca Ltd has sufficient cash at bank.
• Option 2: The owner contributes the machine to the business.

The managers have provided you with following information prior to obtaining the machine:

Sales revenue	$500,000
Net profit	$100,000
Total current liabilities	$400,000
Total liabilities	$900,000
Total current assets	$1,500,000
Total assets	$1,900,000

Required:

Calculate the Debt (to assets) Ratio, Current Ratio and Net Profit Margin after obtaining the machine if either Option 1 or Option 2 is taken.

(5 marks)

	Option 1	Option 2
Debt (to assets) Ratio
Current Ratio
Net Profit Margin

Rebecca Ltd has an existing loan agreement with Wesley Bank, which prescribes that:

• Debt (to assets) Ratio must not exceed 50%
• Current Ratio must be above 1.5 times
• Net Profit Margin must be above 10%

If any of above terms are violated, Wesley Bank has the legal right to step in the business operation.

Required:

Based on your answers above, indicate whether the loan agreement will be violated if Option 1 or Option 2 is taken. (1 mark)

Answer here: