Determining the effects of financial alternatives on ratios Composite Solutions Company (CSC) has the following account balances: Current assets $150,000 Current Liabilities $100,000 Noncurrent assets 350,000 Noncurrent Liabilities 250,000 Stockholders’ Equity 150,000 The company wishes to raise $80,000 in cash and is considering two financial options: CSC can sell $80,000 of bonds payable, or it can issue additional common stock for $80,000. To help the decision process, CSC’s management wants to determine the effects of each alternative on its current ratio and debt to assets ratio.

a. Help CSC’s management by completing the following chart: Ratio Currently If Bonds Are Issued If Stock Is Issued Current Ratio Debt to asset ratio

b. Assume that after the funds are invested, EBIT amounts to $6,000. 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.

a.| Ratio | Currently | If Bonds Are Issued | If Stock Is Issued |Current Ratio | 1.50 | 2.30 | 2.30 | |Debt to asset ratio | 0.70 | 0.74 | 0.60 | Current Total Current Total Situation Assets Assets Liabilities Liabilities Currently 150,000 500,000 100,000 350,000 Using bonds 230,000 580,000 100,000 430,000 Using stock 230,000 580,000 100,000 350,000 If Bonds If Stock Currently Are Issued Is Issued Current ratio (1) 1.5 (2) 2.3 (2) 2.3 Debt to assets ratio (3) 0.7 (4) 0.74 (5) 0.6 (1) 150,000 ÷ 100,000 = 1.5 (2) 230,000 ÷ 100,000 = 2.3 (3) 350,000 ÷ 500,000 = 0.7 (4) 430,000 ÷ 580,000 = 0.74 (5) 350,000 ÷ 580,000 = 0.6

b. Bonds Stock EBIT Interest expense Pretax earnings Tax expense (40%) Net earnings Dividends Additional retained earnings I need answers for part b.