Question
In: Accounting
Composite Solutions Company (CSC) has the following account balances: Current assets $ 29,000 Current liabilities $...
| Composite Solutions Company (CSC) has the following account balances: |
| Current assets | $ | 29,000 | Current liabilities | $ | 10,000 |
| Noncurrent assets | 89,000 | Noncurrent liabilities | 58,000 | ||
| Stockholders’ equity | 50,000 | ||||
|
The company wishes to raise $45,000 in cash and is considering two financing options: CSC can sell $45,000 of bonds payable, or it can issue additional common stock for $45,000. To help in the decision process, CSC’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 CSC’s management. (Round your answers to 2 decimal places.) |
| a-2. |
Compute the debt to assets ratio for CSC’s management. (Round your answers to 1 decimal place.) |
| b. |
Assume that after the funds are invested, EBIT amounts to $19,400. Also assume the company pays $4,100 in dividends or $4,100 in interest depending on which source of financing is used. Based on a 40 percent tax rate, determine the amount of the increase iretained earnings that would result under each financing option. |
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Expert Solution
| Current Assets | Total Assets | Current Liabilites | Total Liabilities | |
| Situation Currently | $29,000 | $118,000 | $10,000 | $68,000(10000+58000) |
| Raise Money: | ||||
| Using Bonds | $74,000(29000+45000) | $163,000(89000+74000) | $10,000 | $113,000(10000+58000+45000) |
| Using Stock | $74,000 | $163,000 | $10,000 | $68,000 |
| Current Ratio Currently ($29,000/$10,000) | 2.9 | |||
| Debt to Assets Ratio Currently($68,000/$118,000) | 0.6 | |||
| Current Ratio if bonds are issued($74,000/$10,000) | 7.4 | |||
| Debt to Assets Ratio if bonds are issue($113,000/$163,000) | 0.7 | |||
| Current Ratio if stocks are issued($74,000/$10,000) | 7.4 | |||
| Debt to Assets Ratio if stocks are issue($68,000/$163,000) | 0.4 | |||
b)
| if pay Dividends | if pay Interest | |
| EBIT | $19,400 | $19,400 |
| Less:Interest | $0 | $4,100 |
| Earnings Before Tax | $19,400 | $15,300 |
| Less:Tax @40% | $7,760 | $6,120 |
| Earnings After Tax | $11,640 | $9,180 |
| Less:Dividend Payment | $4,100 | $0 |
| Retained Earnings | $7,540 | $9,180 |
ekkarill92 answered 1 year agoRelated Solutions
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