Question
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
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:
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