Homework Answers
a-1 :
| Currently | 2.08:1 |
| Bonds | 4.54:1 |
| Stock | 4.54:1 |
Solution -
Current ratio = current assets /current liabilities.
Currently = $27000/$13000 = 2.08
That means, 2.08:1
If bonds are issued :
If bonds are issued then cash increases by $32000 and non current liabilities increases by $32000 (bonds payable gets added to non current liabilities). There is no change in current liabilities.
So, current ratio = ($27000+32000)/$13000 = $59000/$13000 4.54
That means, 4.54:1
If stock is is issued :
If stock issued cash increases by $32000 and stockholders equity increases by $32000.
So, current ratio = ($27000+$32000)/$13000.
= $59000/$13000 = 4.54
That means, 4.54:1
a-2:
| Currently | 70.41% |
| Bonds | 77.69% |
| Stcojy | 53.08% |
Debt to assets = total liabilities /total assets
Currently = ($13000+$56000)/($27000+$71000) = $69000/$98000 = 0.7041 = 70.41%
If bonds :
If bonds are issued both liabilities and assets increases by $32000.
Ratio = ($130000+$56000+$32000)/($27000+$71000+$32000) = $101000/$130000
= 77.69%
If stock issued :
If stock issued, only assets increases by $32000 and no change in liabilities.
Ratio = ($13000+$56000)/($27000+$71000+$32000)
= $69000/$130000
= 53.08%
b.
| Bonds | stock | |
| EBIT | $19500 | $19500 |
| (-) interest | ($4300) | |
| EBT | $15200 | $19500 |
| (-) tax | ($4560) | ($5850) |
| Earnings available to shareholders | $10640 | $13650 |
| (-) dividends | (4300) | |
| Increase in retained earnings | $10640 | $9350 |
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