**** ONLY NEED QUESTION 5 & 6 ****

Information:

Using the money from their recent bond issue, Terrys management has decided to declare an additional $562,500 dividend. The date of declaration is December 30, Year 3. The date of record will be January 15, Year 4, and the date of payment will be January 30, Year 4.

As an additional signal to the market, Terrys management repurchased 205,000 shares of Terrys common stock on December 15, Year 3 for $8.00 a share.

Terrys management would like to know the effect of the sale on the following ratios:

*Current Ratio

*ROA

Assignment:

1. Calculate each of the two (2) ratios before you make any adjustments.

2. Make the appropriate journal entries, if any, to account for Terrys extra dividend and stock repurchase (including any necessary changes to income tax expense).

3. Make any necessary changes to the financial statements.

4. Calculate the two (2) ratios after you make any adjustments.

Critical Thinking:

5. What do you think investors reaction will be to managements decision to issue a new bond? In other words, based on your changes to the financial statements and the change in the ratios, do you think investors will be happy with the decision to issue the new debt? Why or why not?

6. Terrys CFO has been concerned about the issuance of this bond. The company really doesnt need the additional cash at the moment, despite some vague plans to expand in the near future. The rest of the management team, on the other hand, felt that the additional cash would allow them to repurchase shares and pay a larger dividend for the period, both of which would help to calm investors fears after all of the changes that needed to be made to the financial statements this period. Provide two (2) arguments that the CFO could have used to try to talk his colleagues out of issuing the bond.