Clayton Industries has the following account balances: Current assets $ 24,000 Current liabilities $ 6,000 Noncurrent assets 82,000 Noncurrent liabilities 40,000 Stockholders’ equity 60,000 The company wishes to...

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Accounting

Clayton Industries has the following account balances:
Current assets $ 24,000 Current liabilities $ 6,000
Noncurrent assets 82,000 Noncurrent liabilities 40,000
Stockholders’ equity 60,000

The company wishes to raise $37,000 in cash and is considering twofinancing options: Clayton can sell $37,000 of bonds payable, or itcan issue additional common stock for $37,000. To help in thedecision process, Clayton’s management wants to determine theeffects of each alternative on its current ratio and debt-to-assetsratio.

Required
a-1. Compute the current ratio for Clayton’smanagement currently, if bonds are issued, if stock is issued.
a-2. Compute the debt-to-assets ratio forClayton’s management currently, if bonds are issued, if stock isissued.
Assume that after the funds are invested, EBIT amounts to$13,100. Also assume the company pays $4,400 in dividends or $4,400in interest depending on which source of financing is used. Basedon a 30 percent tax rate, determine the amount of the increase inretained earnings that would result under each financingoption.(bonds, stocks)

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4.1 Ratings (513 Votes)

a1 Current assets after issue of bonds or stock will increase by 37000 Hence current ratio will remain same whether funds are raised by issue of bonds or stock Hence current assets 24000 See Answer

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Current assets	$	24,000	Current liabilities	$	6,000
Noncurrent assets		82,000	Noncurrent liabilities		40,000
			Stockholders’ equity		60,000