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

$$18,000$ Current $14$abilities

$72,699$ Noncurrent liabilities

stockholders' equity

The company wishes to raise $$48,000$ in cash and is considering two financing options: Clayton can sell $$48,000$ of bonds payable, or

it can issue additional common stock for $$48,000.$ 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.

$0-2.$ 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 $$18,600.$ Also assume the company pays $$3,400$ in dividends or $$3,400$

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 eamings that would result under each financing option.