Effect of Transactions on Debt Ratios. A firm had the following values for the four debt ratios discussed in the chapter:

1.  Liabilities to Assets Ratio: less than 1.0 
2.  Liabilities to Shareholders’ Equity Ratio: equal to 1.0 
3.  Long-Term Debt to Long-Term Capital Ratio: less than 1.0
4.  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.   (1) The firm issued long-term debt for cash. 
2.   (2) The firm issued short-term debt and used the cash proceeds to redeem long-term debt (treat as a unified transaction). 
3.   (3) The firm redeemed short-term debt with cash. 
4.   (4) The firm issued long-term debt and used the cash proceeds to repurchase shares of its common stock (treat as a unified transaction). 
5. 
   
6. 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 support this statement? Explain.

Answer rating: 100% (QA)

a Liabilities to Asset Ratio 1 1 Liabilities increase due to issue of longterm debt and Asset... View the full answer