QUESTION $2$

$(5$ MARKS$)$

A firm had the following values for the four debt ratios discussed in the chapter:

Liabilities to Assets Ratio: less than $1\mathrm{.}0$

Liabilities to Shareholders' Equity Ratio: equal to $1\mathrm{.}0$

Long$-$Term Debt to Long$-$Term Capital Ratio: less than $1\mathrm{.}0$

Long$-$Term Debt to Shareholders' Equity Ratio: less than $1\mathrm{.}0$

A$.$ Indicate whether each of the following independent transactions increases, decreases, or

has no effect on each of the four debt ratios.

i$.$ The firm issued long$-$term debt for cash.

ii$.$ The firm issued short$-$term debt and used the cash proceeds to redeem long$-$term debt

$($treated as a unified transaction$).$

iii. The firm redeemed short$-$term debt with cash.

iv$.$ The firm issued long$-$term debt and used the cash proceeds to repurchase shares of its

common stock $($treated 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 Part a support this statement?

Explain.