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

Noncurrent assets

$ $27,000$ Current liabilities

$72,000$ Noncurrent liabilities

Stockholders' equity

$ $15,000$

$57,000$

$27,000$

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 $$13,500.$ Also assume the company pays $$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.

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Req A$1$

Req $A2$

Assume that after the funds are invested, EBIT amounts to $$13,500.$ Also assume the company pays $$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 resulk under each financing option.

$\backslash$table$[[,\backslash$table$[[$Additional$],[$Retained Earnings$]]],[$Bonds$,],[$Stock$,]]$