Suppose AOL Time Warner, Inc, assignment help

User Generated

avpxavpxxl

Business Finance

Description

Suppose AOL Time Warner, Inc. is having a bad year in 2011, as the company has incurred a $4.9 billion net loss. The loss has pushed most of the return measures into the negative column and the current ratio dropped below 1.0. The company’s debt ratio is still only 0.27. Assume top management of AOL Time Warner is pondering ways to improve the company’s ratios. In particular, management is considering the following transactions:

  • Sell of the cable television segment of the business for $30 million (receiving half in cash and half in the form of a long-term not receivable.) Book value of the cable television business is $27 million.
  • Borrow $100 million on long-term debt.
  • Purchase treasury stock for $500 million cash.
  • Write off one-fourth of goodwill carried on the books at $128 million.
  • Sell advertising at the normal gross profit of 60%. The advertisements run immediately.

Top management wants to know the effects of these transactions (increase, decrease, or no effect) on the following ratios of AOL Time Warner:

  • Current ratio
  • Debt ratio
  • Times-interest-earned ratio
  • Return on Equity
  • Book value per share of common stock

Some of these transactions have an immediately positive effect on the company’s financial condition. Some are definitely negative. Others have an effect that cannot be judged as clearly positive or negative. Evaluate each transaction’s effect as positive, negative or unclear.

User generated content is uploaded by users for the purposes of learning and should be used following Studypool's honor code & terms of service.

Explanation & Answer

Attached.

1. Sell of the cable television segment of the business for $30 million (receiving half in cash and half
in the form of a long-term not receivable.) Book value of the cable television business is $27
million.
• Effect on Current Ratio: By sell of segment there will be inflow of cash. Current assets will
increase resulting increase in current ratio.
• Debts Ratio: By sell above book value there will be profits on sale which will increase
stockholders equity resulting in to decrease in debts ratio.
• Times Interest Earned Ratio: There will be no effect on it because by sell of segment
neither interest not profits before interest will change.
• Return on Equity: It will decrease in way that net profits will not change but shareholders
equity will increase. If it is calculated on basis of comprehensive income which wil...


Anonymous
Really helpful material, saved me a great deal of time.

Studypool
4.7
Trustpilot
4.5
Sitejabber
4.4

Related Tags