Stennett Corp.'s 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's operating earnings.)
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.

Question

Quizplus · Accepted Answer

The proposal will reduce the number of shares outstanding, which will increase EPS and ROA. The proposal will also increase the amount of debt, which will increase interest expense and reduce taxes paid.