Greenwood Company has the following account balances: The company wishes to raise ($ 80,000) in cash, and

Question:

Greenwood Company has the following account balances:

The company wishes to raise $\$ 80,000$ in cash, and is considering two financing options. Either it can sell $\$ 80,000$ of bonds payable, or it can issue additional common stock for $\$ 80,000$. To help in the decision process, Greenwood's management wants to determine the effects of each alternative on its current ratio and debt to assets ratio.

Required

a. Help Greenwood's management by completing the following chart:

b. Assume that after the funds are invested, EBIT amounts to $\$ 60,000$. Also assume the company pays $\$ 6,000$ in dividends or $\$ 6,000$ 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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