Response to the following problem:
AOL Time Warner, Inc., had a bad year in 2001; the company suffered a net loss. The loss 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:
1. Borrow $100 million of long-term debt.
2. Purchase treasury stock for $500 million cash.
3. Expense one-fourth of goodwill carried on the books at $128 million.
4. Sell advertising, and the advertisements will run immediately.
5. Purchase trademarks from NBC, paying $20 million cash.
Required:
Top management wants to know the effects of these transactions (increase, decrease, or no effect) on the following ratios of AOL Time Warner:
a. Current ratio
b. Debt ratio
c. Return on equity .