Case 1. General Motors, Inc., and Ford Motor Company both had a bad year in 2007; the companies’ auto units suffered net losses. The loss pushed sonic return measures into the negative column, and the companies’ ratios deteriorated. Assume top management of GM and Ford are pondering ways to improve their ratios. In particular, management is considering the following transactions:
1. Borrow $100 million on long-term debt.
2. Purchase treasury stock for $500 million cash.
3. Expense one-fourth of the goodwill carried on the books.
4. Create a new auto-design division at a cash cost of $300 million.
5. Purchase patents from Daimler Chrysler, paying $20 million cash.
Requirement
1. Top management wants to know the effects of these transactions (increase, decrease, or no effect) on the following ratios:
a. Current ratio
b. Debt ratio
c. Return on equity
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