Clayton Industries has the following account balances: Current assets Noncurrent assets $ 22,000 Current liabilities 72,000 Noncurrent liabilities Stockholders' equity The company wishes to raise $35,000 in cash and is considering two financing options: Clayton can sell $35,000 of bonds payable it can issue additional common stock for $35,000. 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. Note: Round your answers to 2 decimal places. Currently If bonds are issued If stock is issued Current Ratio 3.14 to 11 to 1 to 1 $ 7,000 47,000 40,000 a-2. Compute the debt-to-assets ratio for Clayton's management. Note: Round your answers to 1 decimal place.
Clayton Industries has the following account balances: Current assets Noncurrent assets $ 22,000 Current liabilities 72,000 Noncurrent liabilities Stockholders' equity The company wishes to raise $35,000 in cash and is considering two financing options: Clayton can sell $35,000 of bonds payable it can issue additional common stock for $35,000. 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. Note: Round your answers to 2 decimal places. Currently If bonds are issued If stock is issued Current Ratio 3.14 to 11 to 1 to 1 $ 7,000 47,000 40,000 a-2. Compute the debt-to-assets ratio for Clayton's management. Note: Round your answers to 1 decimal place.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Answer b only
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b. Assume that after the funds are invested, EBIT amounts to $17,700. Also assume the company pays $3,500 in dividends or $3,500
in interest depending on which source of financing is used. Based on a 40 percent tax rate, determine the amount of the increase in
retained earnings that would result under each financing option.
Bonds
Stock
4x
Additional
Retained Earnings
3
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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
$ 22,000 Current liabilities
72,000 Noncurrent liabilities
Stockholders' equity
Required
a-1. Compute the current ratio for Clayton's management.
Note: Round your answers to 2 decimal places.
Currently
If bonds are issued
If stock is issued
The company wishes to raise $35,000 in cash and is considering two financing options: Clayton can sell $35,000 of bonds payable
it can issue additional common stock for $35,000. 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.
Currently
Current Ratio
3.14 to 11
to 1
to 1
a-2. Compute the debt-to-assets ratio for Clayton's management.
Note: Round your answers to 1 decimal place.
Saved
Debt to Assets
Ratio
%
$7,000
47,000
40,000
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