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Clayton Industries has the following account balances: Current assets $ 18,000 Current liabilities $ 10,000 Noncurrent assets 81,000 Noncurrent liabilities 54,000 Stockholders equity 35,000

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, Claytons 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 Claytons management. Note: Round your answers to 2 decimal places.

	Current Ratio	:1
Currently		:1
If bonds are issued		:1
If stock is issued		:1

A-2. Compute the debt-to-assets ratio for Claytons 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 $13,700. Also assume the company pays $3,300 in dividends or $3,300 in interest depending on which source of financing is used. Based on a 30 percent tax rate, determine the amount of the increase in retained earnings that would result under each financing option.

	Additional retained earnings
Bonds
Stock

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