Clayton Industries has the following account balances: Current assets Noncurrent assets The company wishes to raise $45,000 in cash and is considering two financing options: Clayton can sell $45,000 of bonds payable, or it can issue additional common stock for $45,000. 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 Currently If bonds are issued If stock is issued $ 22,000 Current liabilities 77,000 Noncurrent liabilities stockholders' equity a-2. Compute the debt-to-assets ratio for Clayton's management. Note: Round your answers to 1 decimal place. Bonds Stock Current Ratio 2.44 to 1 to 1 to 1 Debt to Assets Ratio Additional b. Assume that after the funds are invested, EBIT amounts to $19,900. Also assume the company pays $4,100 in dividends or $4,100 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. Retained Earnings $9,000 50,000 40,000 % % %
Clayton Industries has the following account balances: Current assets Noncurrent assets The company wishes to raise $45,000 in cash and is considering two financing options: Clayton can sell $45,000 of bonds payable, or it can issue additional common stock for $45,000. 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 Currently If bonds are issued If stock is issued $ 22,000 Current liabilities 77,000 Noncurrent liabilities stockholders' equity a-2. Compute the debt-to-assets ratio for Clayton's management. Note: Round your answers to 1 decimal place. Bonds Stock Current Ratio 2.44 to 1 to 1 to 1 Debt to Assets Ratio Additional b. Assume that after the funds are invested, EBIT amounts to $19,900. Also assume the company pays $4,100 in dividends or $4,100 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. Retained Earnings $9,000 50,000 40,000 % % %
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Clayton Industries has the following account balances:
Current assets
Noncurrent assets
The company wishes to raise $45,000 in cash and is considering two financing options: Clayton can sell $45,000 of bonds payable, or
it can issue additional common stock for $45,000. 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
$ 22,000 Current liabilities
77,880 Noncurrent liabilities
stockholders' equity
Currently
If bonds are issued
If stock is issued
Current Ratio
2.44 to 1
a-2. Compute the debt-to-assets ratio for Clayton's management.
Note: Round your answers to 1 decimal place.
Bonds
Stock
to 1
to 1
Debt to Assets
Ratio
Additional
Retained Earnings
$ 9,000
50,000
48,888
%
%
%
b. Assume that after the funds are invested, EBIT amounts to $19,900. Also assume the company pays $4,100 in dividends or $4,100 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.
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