Exercise 10-25A Determining the effects of financing alternatives on ratios LO 10-8

Clayton Industries has the following account balances:

Current assets	$	17,000		Current liabilities	$	11,000
Noncurrent assets		79,000		Noncurrent liabilities		51,000
				Stockholders equity		34,000

The company wishes to raise $43,000 in cash and is considering two financing options: Clayton can sell $43,000 of bonds payable, or it can issue additional common stock for $43,000. 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. Required a-1. Compute the current ratio for Claytons management. (Round your answers to 2 decimal places.)

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

b. Assume that after the funds are invested, EBIT amounts to $12,700. Also assume the company pays $4,800 in dividends or $4,800 in interest depending on which source of financing is used. Based on a 30

Required 3-1. Compute the current ratio for Clayton's management. (Round your answers to 2 decimal places.) Currently if bonds are issued If stock is issued Current Ratio to 1 to 1 to 1 a-2. Compute the debt-to-assets ratio for Clayton's management (Round your answers to 1 decimal place.) Debt to Assets Ratio % Currently W bonds are issued of stock is issued % b. Assume that after the funds are invested, EBIT amounts to $12,700. Also assume the company pays $4,800 in dividends or $4,800 in interest depending on which source of financing is used Based on a 30 percent tax rate, determine the amount of the increase in retained earnings that would result under each financing option Additional Retained Eamings Bonds Stock