question 3

Exercise 10-25A (Algo) Determining the effects of financing alternatives on ratios LO 108 Clayton Industries has the following account balances: The company wishes to raise $38,000 in cash and is considering two financing options: Clayton can sell $38,000 of bonds payable, or it can issue additional common stock for $38,000. To help in the decision process. Clayton's 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 Clayton's management. Note: Round your answers to 2 decimal places. a-2. Compute the debt-to-assets ratio for Clayton's management. Note: Round your answers to 1 decimal place. a-2. Compute the debt-to-assets ratio for Clayton's management. Note: Round your answers to 1 decimal place. b. Assume that after the funds are invested, EBIT amounts to $19,200. Also assume the company pays $3,800 in dividends or $3,800 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