Current assets	$	11,000	Current liabilities	$	12,000
Noncurrent assets		88,000	Noncurrent liabilities		56,000
			Stockholders equity		31,000

The company wishes to raise $46,000 in cash and is considering two financing options: Clayton can sell $46,000 of bonds payable, or it can issue additional common stock for $46,000. To help in the decision process, Claytons management wants to determine the effects of each alternative on its current ratio and debt-to-assets ratio.

a-2. Compute the debt-to-assets ratio for Claytons management. (Round your answers to 1 decimal place.)

Currently:

If bonds are issued:

If stock is issued:

b. Assume that after the funds are invested, EBIT amounts to $12,500. Also assume the company pays $3,200 in dividends or $3,200 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: