Question
A creditor is concerned with both the liquidity and solvency trends of Dyckman Company. The following information is available for Dyckman Company at the current
A creditor is concerned with both the liquidity and solvency trends of Dyckman Company. The following information is available for Dyckman Company at the current year-end ($ thousands).
Current
AssetsTotal
AssetsCurrent
LiabilitiesTotal
LiabilitiesTotal Stockholders'
Equity$5,000$19,000$4,800$9,000$10,000
Dyckman informs this creditor that the company is considering the following transactions.
a. Issuance of common stock for cash for $1 million.
b. Issuance of bonds payable for cash for $1 million.
c. Early retirement of $1 million long-term notes payable with cash.
d. Pay off short term note payable of $500,000.
The creditor wishes to assess the immediate impact that each transaction would have on liquidity and solvency. This creditor measures liquidity using the current ratio, and measures solvency using the total liabilities-to-equity ratio. For each transaction, identify whether it has a positive, negative, or no effect on (1) liquidity and (2) solvency.
Effect on LiquidityEffect on Solvencya.Answer
Negative
No effect
Positive
Answer
Negative
No effect
Positive
b.Answer
Negative
No effect
Positive
Answer
Negative
No effect
Positive
c.Answer
Negative
No effect
Positive
Answer
Negative
No effect
Positive
d.Answer
Negative
No effect
Positive
Answer
Negative
No effect
Positive
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Law, Business And Society
Authors: Tony McAdams, Kiren Dosanjh Zucker, Kristofer Neslund, Kari Smoker
12th Edition
1259721884, 978-1259721885
