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    jamesk486's Avatar
    jamesk486 Posts: 18, Reputation: 1
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    #1

    Jul 21, 2010, 06:46 AM
    Effect on sale when debt paid off
    A company pays off a long-term debt in full. Which one of the following statements describes the effect of the sale on the company?

    A. Current ratio decreases; total debt to equity ratio increases
    B. Current ratio decreases; total debt to equity ratio decreases
    C. Current ratio increases; total debt to equity ratio decreases
    jamesk486's Avatar
    jamesk486 Posts: 18, Reputation: 1
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    #2

    Jul 21, 2010, 06:47 AM

    Oops I also forgot the last choice
    D. Current ratio increases; total debt to equity ratio increases
    jamesk486's Avatar
    jamesk486 Posts: 18, Reputation: 1
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    #3

    Jul 21, 2010, 04:07 PM

    I thought it was B because long debt is paid off so total debt declines and probably cash was used to pay it off so assts would decline.

    Since current ratio is Current Assets/Current Liabilities, wouldn't it decline because cash decreased? And debt to equity would decline as well
    Just Looking's Avatar
    Just Looking Posts: 1,610, Reputation: 480
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    #4

    Jul 21, 2010, 10:44 PM

    You are right, just as you explained it.
    nids.rs's Avatar
    nids.rs Posts: 1, Reputation: 1
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    #5

    Jul 27, 2010, 04:06 AM

    I think the answer should be C.
    Current ratio would increase as the sale is expected to generate cash. It is not mentioned what instruments (cash/stock) were used to pay off long term debt, so increase in current ratio describes the best effect of the sale.
    morgaine300's Avatar
    morgaine300 Posts: 6,561, Reputation: 276
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    #6

    Aug 3, 2010, 02:52 AM

    nids.rs -- First, there was no "sale." Debt was paid off. And you can only "pay" with cash. You don't "pay" things with stock. You can exchange things, but that would not be called "paying."

    Since this was not a sale, there is no cash generated. Cash was paid and goes down, decreasing the numerator.

    The correct answer is still B as originally stated.
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