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Clayton Industries has the following account balances: Current assets Noncurrent assets The company wishes to raise $45,000 in cash and is considering two financing options: Clayton can sell $45,000 of bonds payable, or it can issue additional common stock for $45,000. 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. Currently If bonds are issued If stock is issued Currently If bonds are issued If stock is issued $ 22,000 Current liabilities 77,000 Noncurrent liabilities stockholders' equity a-2. Compute the debt-to-assets ratio for Clayton's management. Note: Round your answers to 1 decimal place. Bonds Stock Current Ratio 2.44 to 1 to 1 to 1 Debt to Assets Ratio Additional b. Assume that after the funds are invested, EBIT amounts to $19,900. Also assume the company pays $4,100 in dividends or $4,100 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. Retained Earnings $9,000 50,000 40,000 % % %

Clayton Industries has the following account balances: Current assets Noncurrent assets The company wishes to raise $45,000 in cash and is considering two financing options: Clayton can sell $45,000 of bonds payable, or it can issue additional common stock for $45,000. 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. Currently If bonds are issued If stock is issued Currently If bonds are issued If stock is issued $ 22,000 Current liabilities 77,000 Noncurrent liabilities stockholders' equity a-2. Compute the debt-to-assets ratio for Clayton's management. Note: Round your answers to 1 decimal place. Bonds Stock Current Ratio 2.44 to 1 to 1 to 1 Debt to Assets Ratio Additional b. Assume that after the funds are invested, EBIT amounts to $19,900. Also assume the company pays $4,100 in dividends or $4,100 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. Retained Earnings $9,000 50,000 40,000 % % %

Principles of Accounting Volume 1
Principles of Accounting Volume 1
19th Edition
ISBN:9781947172685
Author:OpenStax
Publisher:OpenStax
Chapter9: Accounting For Receivables
Section: Chapter Questions
Problem 4TP: You are considering two possible companies for investment purposes. The following data is available...
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Clayton Industries has the following account balances: Current assets Noncurrent assets The company wishes to raise $45,000 in cash and is considering two financing options: Clayton can sell $45,000 of bonds payable, or it can issue additional common stock for $45,000. 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. Currently If bonds are issued If stock is issued $ 22,000 Current liabilities 77,880 Noncurrent liabilities stockholders' equity Currently If bonds are issued If stock is issued Current Ratio 2.44 to 1 a-2. Compute the debt-to-assets ratio for Clayton's management. Note: Round your answers to 1 decimal place. Bonds Stock to 1 to 1 Debt to Assets Ratio Additional Retained Earnings $ 9,000 50,000 48,888 % % % b. Assume that after the funds are invested, EBIT amounts to $19,900. Also assume the company pays $4,100 in dividends or $4,100 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.
Transcribed Image Text:Clayton Industries has the following account balances: Current assets Noncurrent assets The company wishes to raise $45,000 in cash and is considering two financing options: Clayton can sell $45,000 of bonds payable, or it can issue additional common stock for $45,000. 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. Currently If bonds are issued If stock is issued $ 22,000 Current liabilities 77,880 Noncurrent liabilities stockholders' equity Currently If bonds are issued If stock is issued Current Ratio 2.44 to 1 a-2. Compute the debt-to-assets ratio for Clayton's management. Note: Round your answers to 1 decimal place. Bonds Stock to 1 to 1 Debt to Assets Ratio Additional Retained Earnings $ 9,000 50,000 48,888 % % % b. Assume that after the funds are invested, EBIT amounts to $19,900. Also assume the company pays $4,100 in dividends or $4,100 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.
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