Exercise 10-25A (Algo) Determining the effects of financing alternatives on ratios LO 10-8 Clayton Industries has the following account balances. Current assets $ 16,000 Current liabilities $7,000 Noncurrent assets 74,000 Noncurrent liabilities 49,000 Stockholders' equity 34,000 The company wishes to raise $41,000 in cash and is considering two financing options: Clayton can sell $41,000 bonds payable, or it can issue additional common stock for $41,000. 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. a-2. Compute the debt-to-assets ratio for Clayton's management. b. Assume that after the funds are invested, EBIT amounts to $14,200. Also assume the company pays $4,200 in dividends or $4,200 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.
Exercise 10-25A (Algo) Determining the effects of financing alternatives on ratios LO 10-8 Clayton Industries has the following account balances. Current assets $ 16,000 Current liabilities $7,000 Noncurrent assets 74,000 Noncurrent liabilities 49,000 Stockholders' equity 34,000 The company wishes to raise $41,000 in cash and is considering two financing options: Clayton can sell $41,000 bonds payable, or it can issue additional common stock for $41,000. 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. a-2. Compute the debt-to-assets ratio for Clayton's management. b. Assume that after the funds are invested, EBIT amounts to $14,200. Also assume the company pays $4,200 in dividends or $4,200 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.
Cornerstones of Financial Accounting
4th Edition
ISBN:9781337690881
Author:Jay Rich, Jeff Jones
Publisher:Jay Rich, Jeff Jones
Chapter9: Long-term Liabilities
Section: Chapter Questions
Problem 60BE
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![Exercise 10-25A (Algo) Determining the effects of financing alternatives on ratios LO 10-8
Clayton Industries has the following account balances. Current assets $ 16,000 Current liabilities $ 7,000 Noncurrent
assets 74,000 Noncurrent liabilities 49,000 Stockholders' equity 34,000
The company wishes to raise $41,000 in cash and is considering two financing options: Clayton can sell $41,000 of bonds
payable, or it can issue additional common stock for $41,000. 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.
a-2. Compute the debt-to-assets ratio for Clayton's management.
b. Assume that after the funds are invested, EBIT amounts to $14,200. Also assume the company pays $4,200 in dividends
or $4,200 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.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F2b19c675-9ec5-4741-a020-f39fe11fe419%2F7b8bab2e-4795-4b6d-b3fe-da55d12b653a%2Ffv62508_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Exercise 10-25A (Algo) Determining the effects of financing alternatives on ratios LO 10-8
Clayton Industries has the following account balances. Current assets $ 16,000 Current liabilities $ 7,000 Noncurrent
assets 74,000 Noncurrent liabilities 49,000 Stockholders' equity 34,000
The company wishes to raise $41,000 in cash and is considering two financing options: Clayton can sell $41,000 of bonds
payable, or it can issue additional common stock for $41,000. 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.
a-2. Compute the debt-to-assets ratio for Clayton's management.
b. Assume that after the funds are invested, EBIT amounts to $14,200. Also assume the company pays $4,200 in dividends
or $4,200 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.
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