Question

Clayton Industries has the following account balances: $ 10,000 50,000 $ 20,000 Current liabilities 80,000 Noncurrent liabilities Stockholders' equity Current assets Noncurrent assets 40,000 The company wishes to raise $40,000 in cash and is considering two financing options: Clayton can sell $40,000 of bonds payable, or it can issue additional common stock for $40,000. 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. (Round your answers to 2 decimal places.) Current Ratio Currently to 1 If bonds are issued to 1 If stock is issued to 1

Answer 1

(1)

current ratio = current assets/current liabilities

currently,

= $20000/$10000 = 2 times

if bonds are issued,

= ($20000 + $40000)/$10000 = 6 times

if stock is issued,

= ($20000 + $40000)/$10000 = 6 times

(2)

debt to asset ratio = total liabilities/total assets

currently,

= ($10000 + $50000)/($20000 + $80000) = 60%

if bonds are issued,

= ($10000 + $50000 + $40000)/($20000 + $80000 + $40000) = 71.4%

if stock is issued,

= ($10000 + $50000)/($20000 + $80000 + $40000) = 42.86%

(3)

if bonds are issued,

additional retained earnings = EBIT - interest - tax

= $12000 - $4000 - {($12000 - $4000) x 30%}

= $5600

if stock are issued,

additional retained earnings = EBIT - tax - dividends

= $12000 - ($12000 x 30%) - $4000

= $4400