Exercise 10-25A (Algo) Determining the effects of financing alternatives on ratios LO 10-8 Clayton...
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Exercise 10-25A (Algo) Determining the effects of financing alternatives on ratios LO 10-8
Clayton Industries has the following account balances. Current assets $ 16,000 Current liabilities $ 7,000 Noncurrent assets 74,000 Noncurrent liabilities 49,000 Stockholders equity 34,000
The company wishes to raise $41,000 in cash and is considering two financing options: Clayton can sell $41,000 of bonds payable, or it can issue additional common stock for $41,000. 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.
a-2. Compute the debt-to-assets ratio for Claytons management.
b. Assume that after the funds are invested, EBIT amounts to $14,200. Also assume the company pays $4,200 in dividends or $4,200 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.
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