Exercise 10-25A (Algo) Determining the effects of financing alternatives on ratios LO 10-8
Clayton Industries has the following account balances:
Current assets $ 18,000 Current liabilities $ 7,000
Noncurrent assets 72,000 Noncurrent liabilities 43,000
Stockholders' equity 40,000
The company wishes to raise $48,000 in cash and is considering two financing options: Clayton can sell $48,000 of bonds payable, or
it can issue additional common stock for $48,000. To help in the decision process, Clayton's management wants to determine the
effects of each alternative on its current ratio and debt-to-assets ratio.
Required
a-1. Compute the current ratio for Clayton's management.
Note: Round your answers to 2 decimal places.
Current Ratio
Currently to 1
If bonds are issued to 1
If stock is issued to 1
a-2. Compute the debt-to-assets ratio for Clayton's management.
Note: Round your answers to 1 decimal place.
Debt-to-Assets
Ratio
Currently
If bonds are issued
If stock is issued
b. Assume that after the funds are invested, EBIT amounts to $18,600. Also assume the company pays $3,400 in dividends or $3,400
in interest depending on which source of financing is used. Based on a 40 percent tax rate, determine the amount of the increase in
retained earnings that would result under each financing option.
Before-Tax
Earnings
Bonds
Stock
