Exercise 10-25A on page 572

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 financing options: CSC can sell $80,000 of bonds payable, or it can issue additional common stock for $80,000. To help the decision process, CSCs management wants to determine the effects of each alternative on its current ratio and debt to assets ratio.

Help CSCs management company by completing the following chart

Ratio Currently If bonds are issued If stock is issued

Current ratio:

Debt to asset ratio:

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% tax rate, determine the amount of the increase in retained earnings that would result under each financing option.