A firm had the following values for the four debt ratios discussed in the chapter:
Liabilities to Assets Ratio: less than 1.0
Liabilities to Shareholders’ Equity Ratio: equal to 1.0
Long-Term Debt to Long-Term Capital Ratio: less than 1.0
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) The firm issued long-term debt for cash.
(2) The firm issued short-term debt and used the cash proceeds to redeem long-term debt (treat as a unified transaction).
(3) The firm redeemed short-term debt with cash.
(4) The firm issued long-term debt and used the cash proceeds to repurchase shares of its common stock (treat as a unified transaction).
b. The text states that analyst 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.