Exercise $10-25$A $($Algo$)$ Determining the effects of financing alternatives on ratios LO $10-8$

Clayton Industries has the following account balances:

Current assets $ $29,000$ Current liabilities $ $11,000$

Noncurrent assets $82,000$ Noncurrent liabilities $49,000$

Stockholders$$ equity $51,000$

The company wishes to raise $$50,000$ in cash and is considering two financing options: Clayton can sell $$50,000$ of bonds payable, or it can issue additional common stock for $$50,000.$ To help in the decision process, Clayton$$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.

b$.$ Assume that after the funds are invested, EBIT amounts to $$15,700.$ Also assume the company pays $$3,900$ in dividends or $$3,900$ 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.