b. Assume that after the funds are invested, EBIT amounts to $14,900. Also assume the company pays $4,300 in dividends or $4,300 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 earnings that would result under each financing option. Bonds Stock Additional Retained Earnings Clayton Industries has the following account balances: Current assets Noncurrent assets $ 22,000 Current liabilities 74,000 Noncurrent liabilities Stockholders' equity $ 9,000 51,000 36,000 The company wishes to raise $35,000 in cash and is considering two financing options: Clayton can sell $35,000 of bonds payable, or it can issue additional common stock for $35,000. 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. Currently If bonds are issued If stock is issued Current Ratio to 1 to 1 to 1 a-2. Compute the debt-to-assets ratio for Clayton's management. Note: Round your answers to 1 decimal place. Currently If bonds are issued If stock is issued Debt to Assets Ratio % % % b. Assume that after the funds are invested, EBIT amounts to $14,900. Also assume the company pays $4,300 in dividends or $4,300 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 earnings that would result under each financing option.
b. Assume that after the funds are invested, EBIT amounts to $14,900. Also assume the company pays $4,300 in dividends or $4,300 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 earnings that would result under each financing option. Bonds Stock Additional Retained Earnings Clayton Industries has the following account balances: Current assets Noncurrent assets $ 22,000 Current liabilities 74,000 Noncurrent liabilities Stockholders' equity $ 9,000 51,000 36,000 The company wishes to raise $35,000 in cash and is considering two financing options: Clayton can sell $35,000 of bonds payable, or it can issue additional common stock for $35,000. 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. Currently If bonds are issued If stock is issued Current Ratio to 1 to 1 to 1 a-2. Compute the debt-to-assets ratio for Clayton's management. Note: Round your answers to 1 decimal place. Currently If bonds are issued If stock is issued Debt to Assets Ratio % % % b. Assume that after the funds are invested, EBIT amounts to $14,900. Also assume the company pays $4,300 in dividends or $4,300 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 earnings that would result under each financing option.
Chapter14: Capital Structure Management In Practice
Section: Chapter Questions
Problem 20P
Related questions
Question
Transcribed Image Text:b. Assume that after the funds are invested, EBIT amounts to $14,900. Also assume the company pays $4,300 in dividends or $4,300
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 earnings that would result under each financing option.
Bonds
Stock
Additional
Retained Earnings
Transcribed Image Text:Clayton Industries has the following account balances:
Current assets
Noncurrent assets
$ 22,000 Current liabilities
74,000 Noncurrent liabilities
Stockholders' equity
$ 9,000
51,000
36,000
The company wishes to raise $35,000 in cash and is considering two financing options: Clayton can sell $35,000 of bonds payable, or
it can issue additional common stock for $35,000. 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.
Currently
If bonds are issued
If stock is issued
Current Ratio
to 1
to 1
to 1
a-2. Compute the debt-to-assets ratio for Clayton's management.
Note: Round your answers to 1 decimal place.
Currently
If bonds are issued
If stock is issued
Debt to Assets
Ratio
%
%
%
b. Assume that after the funds are invested, EBIT amounts to $14,900. Also assume the company pays $4,300 in dividends or $4,300
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 earnings that would result under each financing option.
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