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 The company wishes to raise $49,000 in cash and is considering two financing options: Clayton can sell $49,000 of bonds payable, or it can issue additional common stock for $49,000. 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 $ 13,000 Current liabilities 73,000 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 1.30 to 1 6.20 to 1 6.20 to 1 Debt to Assets Ratio Additional b. Assume that after the funds are invested, EBIT amounts to $12,600. 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. Retained Earnings $ 10,000 52,000 24,000 % % %
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 The company wishes to raise $49,000 in cash and is considering two financing options: Clayton can sell $49,000 of bonds payable, or it can issue additional common stock for $49,000. 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 $ 13,000 Current liabilities 73,000 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 1.30 to 1 6.20 to 1 6.20 to 1 Debt to Assets Ratio Additional b. Assume that after the funds are invested, EBIT amounts to $12,600. 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. Retained Earnings $ 10,000 52,000 24,000 % % %
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text: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
The company wishes to raise $49,000 in cash and is considering two financing options: Clayton can sell $49,000 of bonds payable, or it can
issue additional common stock for $49,000. 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
$ 13,000 Current liabilities
73,000 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
1.30 to 1
6.20 to 1
6.20 to 1
Debt to Assets
Ratio
Additional
b. Assume that after the funds are invested, EBIT amounts to $12,600. 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.
Retained Earnings
$ 10,000
52,000
24,000
%
%
%
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