ABC and XYZ companies both had a bad year in 2010; the companies’ suffered net losses. Due to the losses, some of the measures of return deteriorated for both companies. Assume top management of ABC and XYZ are pondering ways to improve their ratios for the following year. In particular, management is considering the following transactions:
1. Borrow $100 million on long-term debt.
2. Purchase treasury stock for $500 million cash.
3. Expense one-fourth of the goodwill carried on the books.
4. Create a new design division at a cash cost of $300 million.
5. Purchase patents from Johnson, Co., paying $20 million cash.
Requirement
1. Top management wants to know the effects of these transactions (increase, decrease, or no effect) on the following ratios:
a. Current ratio
b. Debt ratio
c. Rate of return on common stockholders’ equity