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

Clayton Industries has the following account balances:

The company wishes to raise $\backslash (\backslash$$ $42,000\backslash )$ in cash and is considering two financing options: Clayton can sell $\backslash (\backslash$$ $42,000\backslash )$ of bonds payable, or it can issue additional common stock for $\backslash (\backslash$$ $42,000\backslash ).$ 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 $\backslash (\backslash$$ $14,600\backslash ).$ Also assume the company pays $\backslash (\backslash$$ $4,000\backslash )$ in dividends or $\backslash (\backslash$$ $4,000\backslash )$ 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.

Complete this question by entering your answers in the tabs below.

Req A$1$

Req A$2$

Req B

Compute the current ratio for Clayton's management.

Note: Round your answers to $2$ decimal places. Complete this question by entering your answers in the tabs below.

Req A$1$

Req A$2$

Req B

Compute the debt$-$to$-$assets ratio for Clayton's management.

Note: Round your answers to $1$ decimal place. Complete this question by entering your answers in the tabs below.

Req A$1$

Req A$2$

Req B

Assume that after the funds are invested, EBIT amounts to $\backslash (\backslash$$ $14,600\backslash ).$ Also assume the company pays $\backslash (\backslash$$ $4,000\backslash )$ in dividends or $\backslash (\backslash$$ $4,000\backslash )$ 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.