The Stennett Corp. CFO has proposed that the company issue new debt and use the

Question

The Stennett Corp. CFO has proposed that the company issue new debt and use the proceeds to buy back common stock. Which of the following are likely to occur if this proposal is adopted? (Assume that the proposal would have no effect on the company operating earnings.)
Choose one answer.
a. Return on assets (ROA) will decline.
b. The times interest earned ratio (TIE) will increase.
c. Taxes paid will decline.
d. None of the statements above is correct.
e. Statements a and c are correct

Explanation / Answer

Answer e. a and c are correct. Return on Assets will decline because of the increase in debt payments (--> reduction of net income). Because of the lower income, taxes will decline.

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