Individual transactions often have a significant impact on ratios. This problem will consider the direction of such an impact.
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Times
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Debt/
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Debt
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Interest
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Debt
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Equity
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to Tangible
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Ratio Transaction
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Earned
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Ratio
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Ratio
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Net Worth
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a. Purchase of buildings financed by mortgage.
b. Purchase of inventory on short-term loan at 1% over prime rate.
c. Declaration and payment of cash dividend.
d. Declaration and payment of stock dividend.
e. Firm increases profits by cutting cost of sales.
f. Appropriation of retained earnings.
g. Sale of common stock.
h. Repayment of long-term bank loan.
i. Conversion of bonds to common stock outstanding.
j. Sale of inventory at greater than cost.
Required:
Indicate the effect of each of the transactions on the ratios listed. Use + to indicate an increase, - to indi- cate a decrease, and 0 to indicate no effect. Assume an initial times interest earned of more than 1, and a debt ratio, debt/equity ratio, and a total debt to tangible net worth of less than 1.