Which event increases the debt/equity ratio?

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Clarification of Question by tokyogayle-ga on 24 Aug 2004 17:34 PDT

Purchase of treasury stock or Sales of treasury stock for more than
its cost, or sale of treasury stock for less than its cost or payment
of cash dividends which were previously declared

To increase the D/E ratio, you must either increase the debt or
decrease the equity.

1. Purchase of TS

Treasury stock is a contra equity account therefore the entity's net
equity is decreased by the amount of TS purchased - assuming a
constant level of debt, then the D/E ratio rises.

2.  Sale of TS at more than its cost

Reducing the amount of TS on the books reduces the contra-equity
account described above.  Any premium paid goes into additional paid
in capital (which itself is a component of equity).  As such since net
equity is increasing, the D/E ratio falls under this scenario.

3.  Sale of TS at less than it's historical cost.

Though I don't have my old accounting text in front of me, I do
remember that a company can neither book a gain or loss on the sale of
it's stock - all the effects go through the equity section directly. 
If the total "discount" on the historical cost is greater than the
carrying value of the TS, net equity will decline, if it is the same,
there will be no effect, if it is less, then equity will increase. 
Since the D/E ratio will change in inversely with the change in net
equity, the answer is D/E ratio rise, stays the same or falls
depending on the extent of the discount.

4. Issuance of a previously declared dividend

Dividends declared but not paid are usually accounted for as a
liability.  Therefore the payment of the dividend decreases the debt
while leaving the equity section alone (the equity was already reduce
at dividend declaration time).  D/E ratio falls as a result