(Learning Objective 4, 5: Assess the effects of transactions on a company)Suppose United Cable and Entertainment, Inc., is having a bad year in 2018, because thecompany has incurred a $4.9 billion net loss. The loss has pushed most of the company’s returnmeasures into the negative column, and its current ratio dropped below 1.0. The company’s debtratio is still only 0.27. Top management of United Cable and Entertainment is considering waysto improve the company’s ratios, including the following possible transactions:1. Selling off the cable television segment of the business for $30 million (receiving half incash and half in the form of a long-term note receivable). The book value of the cable television business is $27 million.2. Borrowing $100 million on long-term debt.3. Purchasing treasury stock for $500 million cash.4. Writing off one-fourth of the goodwill carried on the books at $128 million.5. Selling advertising at the normal gross profit of 60%. The advertisements run immediately.6. Purchasing trademarks from NBC, paying $20 million cash and signing a one-year notepayable for $80 million.Requirements1. Top management wants to know the effects of these transactions (increase, decrease, or noeffect) on the following ratios of United Cable and Entertainment:a. Current ratiob. Debt ratioc. Times-interest-earned ratio (measured as [Net income + Interest expense]/Interestexpense)d. Return on equity
(Learning Objective 4, 5: Assess the effects of transactions on a company)
Suppose United Cable and Entertainment, Inc., is having a bad year in 2018, because the
company has incurred a $4.9 billion net loss. The loss has pushed most of the company’s return
measures into the negative column, and its
ratio is still only 0.27. Top management of United Cable and Entertainment is considering ways
to improve the company’s ratios, including the following possible transactions:
1. Selling off the cable television segment of the business for $30 million (receiving half in
cash and half in the form of a long-term note receivable). The book value of the cable television business is $27 million.
2. Borrowing $100 million on long-term debt.
3. Purchasing
4. Writing off one-fourth of the
5. Selling advertising at the normal gross profit of 60%. The advertisements run immediately.
6. Purchasing trademarks from NBC, paying $20 million cash and signing a one-year note
payable for $80 million.
Requirements
1. Top management wants to know the effects of these transactions (increase, decrease, or no
effect) on the following ratios of United Cable and Entertainment:
a. Current ratio
b. Debt ratio
c. Times-interest-earned ratio (measured as [Net income + Interest expense]/Interest
expense)
d. Return on equity
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