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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 Noncurrent assets $ 12,000 89,000 Current liabilities Noncurrent liabilities Stockholders' equity $ 12,000 55,000 34,000 The company wishes to raise $33,000 in cash and is considering two financing options: Clayton can sell $33,000 of bonds payable, or it can issue additional common stock for $33,000. 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. (Round your answers to 2 decimal places.) Current Ratio Currently If bonds are issued If stock is issued 1.00 to 1 3.75 to 1 3.75 to 1 a-2. Compute the debt-to-assets ratio for Clayton's management. (Round your answers to 1 decimal place.) Debt to Assets Ratio Currently 66.3% If bonds are issued 74.61% If stock is issued 50.01% b. Assume that after the funds are invested, EBIT amounts to $13,000. Also assume the company pays $3,200 in dividends or $3,200 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. Additional Retained Earnings Bonds Stock

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