Question

Casey Communications recently issued new common stock and used the proceeds to pay off some of its short-term notes payable. This action had no effect on the company's total assets or operating income. Which of the following effects would occur as a result of this action?a. The company's current ratio increased.b. The company's times interest earned ratio decreased.c. The company's basic earning power ratio increased.d. The company's equity multiplier increased.e. The company's debt ratio increased.

Answer 1

Answer:

The correct answer is a. The company's current ratio increased.

Explanation:

Common shares are the main form of participation in corporate capital, a type of securities.

The terms "with the right to vote" or "ordinary share" are also frequently used to designate common stock. It is called "common" to distinguish it from preferred shares.

If there are two types of shares, common stockholders cannot receive dividends until all preferred stock dividends are paid in full.

In the event of bankruptcy, in addition, investors in common shares receive the remaining funds after all creditors (including employees) are paid, and the holders of preferred shares. Therefore, investors in common stock often receive nothing after bankruptcy. On the other hand, common stock on average has a better performance (higher profitability) than preferred stock or bonds.