Decision Cases

LO $4,5$ C$12-74.($Learning Objective $4,5$: Assess the effects of transactions on a company$)$ Suppose United Cable and Entertainment, Inc, is having a bad year in $2021,$ because the company has incurred a $$4\mathrm{.}9$ billion net loss. The loss has pushed most of the company's return measures into the negative column, and its current ratio dropped below $1\mathrm{.}0.$ The company's debt ratio is still only $0\mathrm{.}27.$ Top management of United Cable and Entertainment is considering ways to improve the company's ratios, including the following possible transactions:

Selling off the cable television segment of the business for $$30$ million $($receiving half in cash and half in the form of a long$-$term note receivable$).$ The book value of the cable television business is $$27$ million.

Borrowing $$100$ million on long$-$term debt.

Purchasing treasury stock for $$500$ million cash.

Writing off one$-$fourth of the goodwill carried on the books at $$128$ million.

Selling advertising at the normal gross profit of $60\%.$ The advertisements run immediately.

Purchasing trademarks from NBC$,$ paying $$20$ million cash and signing a one$-$year note payable for $$80$ million.

Requirements

Top management wants to know the effects of these transactions $($increase$,$ decrease, or no effect$)$ on the following ratios of United Cable and Entertainment:

a$.$ Current ratio

b$.$ Debt ratio

c$.$ Thines$-$interest$-$earned ratio $($measured as

$[$Net income $+$ Interest expense$]/$Interest expense$)$

d$.$ Return on equity

Some of these transactions have an immediate positive effect on the company's financial condition. Some are negative. Others are neither clearly positive nor clearly negative. Evaluate each transaction's effect as positive, negative, or unclear. $($Challenge$)$