Question

Mr. X has been seen his business growing and increasing. It is a good business because online sales are available to reach all segment customers. The company is categorized as Small Medium Enterprises. Mr. X tried to anticipate these sales increased by buying more inventories. By buying more inventories, the company can fulfill increasing demand and attract new customers. This is data at present time:

Total Assets IDR 100

Fixed Assets IDR 40

Total current assets IDR 60 which including cash and inventory for IDR 32

Total current liabilities IDR 10

Share Paid Capital is IDR 90

Mr. X plans to expand his business for medium and long planning and it requires long term resources to finance more equipment.

Questions:

a. If the company wants Debt to Asset = 0,50. How much long-term liabilities is needed?

b. What is the changes in Debt to Equity Ratio.?

c. Using the old data (before the DER changes), company want to have current ratio = 2. How much credit purchase need to be made if the company wants current ratio =2?

Answer 1

a.
The company wants Debt to Asset to be 0.50
Debt to Asset Ratio = Total Debt / Total Assets.
Currently, the Debt to Asset Ratio of the company is Zero since the company has no debt.
Therefore, Let the required Long term liabilities be x.
Therefore, Debt to Asset of 0.5 = x / (100 + x)
0.5 = x / (100 + x)
50 + 0.5x = x
50 = 0.5x
Therefore, x = 100

Therefore, Long Term Liabilities needed to have a Debt Asset Ratio of 0.5 is 100 IDR.

b.
Debt to Equity Ratio = Total Long Term Liabilities / Total Share Capital
The current Debt to Equity Ratio is zero since there are no long term liabilities currently.
However, as seen in sub question a we would require long term liabilities of IDR 100
Therefore,
New Debt to Equity Ratio = Total Long Term Liabilities / Total Share Capital
= 100 / 90
= 1.11

Change in Debt to Equity Ratio = New Debt to Equity Ratio - Old Debt to Equity Ratio
= 1.11 - 0
= 1.11

Therefore, changes in Debt to Equity Ratio = 1.11

c.
Current Ratio = Current Assets / Current Liabilities
Therefore, Old Current Ratio = 60 / 10 = 6
The company wants a Current Ratio of 2.
Let the additional credit purchases by Y

Therefore, 2 = (60 + y) / (10 + y)
20 + 2y = 60 + y
y = 40
Therefore, y = 40

Therefore, the company needs to make credit purchases worth 40 IDR if it wants the Current Ratio to be 2.