Financial Reporting, Financial Statement Analysis and Valuation
8th Edition
ISBN: 9781305176348
Author: WAHLEN, James M
Publisher: Cengage Learning
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Textbook Question
Chapter 5, Problem 6QE
A firm had the following values for the four debt ratios discussed in the chapter:
Liabilities to Assets Ratio: less than 1.0
Liabilities to Shareholders’ Equity Ratio: equal to 1.0
Long-Term Debt to Long-Term Capital Ratio: less than 1.0
Long-Term Debt to Shareholders’ Equity Ratio: less than 1.0
- a. Indicate whether each of the following independent transactions increases, decreases, or has no effect on each of the four debt ratios.
- (1) The firm issued long-term debt for cash.
- (2) The firm issued short-term debt and used the cash proceeds to redeem long-term debt (treat as a unified transaction).
- (3) The firm redeemed short-term debt with cash.
- (4) The firm issued long-term debt and used the cash proceeds to repurchase shares of its common stock (treat as a unified transaction).
- b. The text states that analysts need not compute all four debt ratios each year because the debt ratios are highly correlated. Does your analysis in Requirement a support this statement? Explain.
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Chapter 5 Solutions
Financial Reporting, Financial Statement Analysis and Valuation
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