Question

Pear Corporation is a hypothetical company with financial results similar to Apple, Inc. Pear has been entering into a financing transactions over the past few years, the results of which can be seen in stacked line graphs: Pear Inc.'s Debt vs. Equity (in billions of dollars) Pear Inc.'s Debt vs. Equity (as a percentage of total assets) $400 100% $350 8096 $300 $250 6096 $200 40% $150

Answer 1

Answer 3:- Following transactions would have contributed to the trend shown in the graphs :-

1) Pear repurchased 72 billion dollars of its common stock during the year.

3) Pear obtained 25 billion dollar in new long term debt last year.

Explanation :-

Total Capital = Total Common stock issued + Total outside liabilities

As we can see in the graph , there is an increase in percentage of Long term debt as compared to previous year while the decrease in the percentage of common stock in this year.

Reason behind the four options of required 3

1. Repurchasing of the common stock results in decreased proportion of equity during the year which tends to show the trend in the graph.

2. Payment of cash to buy property ,plant and equipment does not affect the liability side of balance sheet rather it will affect the asset side and debt equity ratio would not be affected.

3. Obtaining of long term loan directly affects the debt equity composition. As it is what is mentioned in the graph.

4. Also, obtaining money by selling investments does not affect the composition of debt and equity in the company pear. Sale of invetment would have effect in investment account and cash/bank account and not in common stock and long term debt portion which is shown in graph above.