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)
