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Financial statement analysis: Err Company

17. Err Company has a major lawsuit against them for unsafe products. It recognizes a huge liability in 2008 of $300M. The effect of this liability is to decrease stockholders' equity by 50%. In 2009, the effect of recognizing this lawsuit in 2008, all else being equal in 2009, is:
A) Return on net operating assets will increase dramatically
B) Return on net operating assets will decrease dramatically
C) Return on equity will increase dramatically
D) Return on equity will decrease dramatically

30. If a company issues a 1% stock dividend what is the effect on the following ratios, all other things being equal?

Total Debt/Equity Times Interest Earned Financial Leverage Ratio
A) Increase Increase Increase
B) Increase No effect Increase
C) Increase No effect No effect
D) No effect No effect No effect

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As I have explained when calculating ROE we divided earnings available for shareholders by shareholders equity. 300m reduces shareholders equity. So next year when you divide earnings with reduced shareholder equity, the ROE will automatically increase.

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17. Err Company has a major lawsuit against them for unsafe products. It recognizes a huge liability in 2008 of $300M. The effect of this liability is to decrease stockholders' ...

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The solution provide an explanation to Financial statement analysis for Err Company

$2.19