06 Feb Assume a major Canadian company had a bad year in
Assume a major Canadian company had a bad year in 2014, when it suffered a $4.9 billion net loss. The loss pushed most of the return measures into the negative column and the current ratio dropped below 1.0. The company s debt ratio is still only 0.27. Assume top management is pondering ways to improve the company s ratios. In particular, management is considering the following transactions: 1. Sell off a segment of the business for $30 million (receiving half in cash and half in the form of a long-term note receivable). Book value of the segment business is $27 million. 2. Borrow $100 million on long-term debt. 3. Repurchase common shares for $500 million cash. 4. Write off one-fourth of goodwill carried on the books at $128 million. 5. Sell advertising at the normal gross profit of 60%. The advertisements run immediately. 6. Purchase trademarks from a competitor, paying $20 million cash and signing a one-year note payable for $80 million. Requirements 1. Top management wants to know the effects of these transactions (increase, decrease, or no effect) on the following ratios of the company: a. Current ratio b. Debt ratio c. Times-interest-earned ratio d. Return on equity e. Book value per common share 2. Some of these transactions have an immediately positive effect on the company s financial condition. Some are definitely negative. Others have an effect that cannot be judged as clearly positive or negative. Evaluate each transaction s effect as p
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