ABC and XYZ companies both had a bad year in 2010; the companies suffered net losses. Due
Question:
1. Borrow $100 million on long-term debt.
2. Purchase treasury stock for $500 million cash.
3. Expense one-fourth of the goodwill carried on the books.
4. Create a new design division at a cash cost of $300 million.
5. Purchase patents from Johnson, Co., paying $20 million cash.
Requirement
1. Top management wants to know the effects of these transactions (increase, decrease, or no effect) on the following ratios:
a. Current ratio
b. Debt ratio
c. Rate of return on common stockholders’ equity
Goodwill
Goodwill is an important concept and terminology in accounting which means good reputation. The word goodwill is used at various places in accounting but it is recognized only at the time of a business combination. There are generally two types of...
Step by Step Answer:
Trans action Current Ratio Debt Ratio Return on Equity 1 Increa...View the full answer
Financial and Managerial Accounting
ISBN: 978-0132497978
3rd Edition
Authors: Horngren, Harrison, Oliver
Related Video
Treasury stock refers to shares of a company\'s own stock that the company has bought back from its shareholders and now holds as a form of asset on its balance sheet. When a company buys back its own stock, it reduces the number of outstanding shares in the market, which can potentially increase the value of the remaining shares. Treasury stock can be acquired through a variety of methods, such as open market purchases, negotiated transactions, or as a result of converting convertible securities. Companies may buy back their own shares for a number of reasons, including to return capital to shareholders, to signal confidence in the company\'s future, or to use the shares for employee stock option plans. While treasury stock does not pay dividends, it can be reissued by the company at a later time, which could dilute the value of the remaining shares. Companies are required to report their treasury stock holdings in their financial statements.
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