Assume a major Canadian company had a bad year in 2017, when it suffered a $4.9 billion net loss. The loss pushed most
Assume a major Canadian company had a bad year in 2017, 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.
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 positive, negative, or unclear?