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Phefo Ltd is experiencing challenges in 2019 as the company has incurred a R4.9 billion net loss. The loss has pushed most of the earnings measures into the negative column and the current ratio dropped below 1.0. The company's debt ratio is still only 0.27. Management is considering the following transactions:
1. Sell off a segment of the business for R30 million (receiving half in cash and half in the form of a long-term receivable). The book value of the segment is R27 million.
2. Borrow R100 million on long term debt.
Problem 1: Top management wants to know the effects for both of these transactions separately (increase / decrease or no effect) on the following ratios:
a) current ratio
b) debt/equity ratio
c) return on equity (ROE)
d) times interest earned ratio (Interest cover ratio)
e) book value per ordinary shares
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