Handy Ltd is a glove manufacturer in Melbourne. The managers decide to obtain an automatedmachine worth $1,000,000. As a result of obtaining such a machine, there will be a $100,000reduction in total expense. The managers are considering the following options:Option 1: Purchase the machine with existing cash at the business bank account, assumingHandy 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$100,000$400,000$900,000$1,500,000$1,900,000Net profitTotal current liabilitiesTotal liabilitiesTotal current assetsTotal assetsRequired:Calculate the Debt (to assets) Ratio, Current Ratio and Net Profit Margin after obtaining themachine if either Option 1 or Option 2 is taken.Option 1Option 2Debt (to assets) RatioCurrent RatioNet Profit MarginHandy Ltd has an existing loan agreement with Hilltop Bank, which prescribes that:Debt (to assets) Ratio must not exceed 50%Current Ratio must be above 1.5 timesNet profit Margin must be above 10%If any of above terms are violated, Hilltop 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 orOption 2 is taken.Answer:

Handy 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:

Handy 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:

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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