Question

In: Accounting

Clayton Industries has the following account balances: Current assets $ 24,000 Current liabilities $ 6,000 Noncurrent...

Clayton Industries has the following account balances:

Current assets $ 24,000 Current liabilities $ 6,000
Noncurrent assets 82,000 Noncurrent liabilities 40,000
Stockholders’ equity 60,000


The company wishes to raise $37,000 in cash and is considering two financing options: Clayton can sell $37,000 of bonds payable, or it can issue additional common stock for $37,000. 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 currently, if bonds are issued, if stock is issued.

a-2. Compute the debt-to-assets ratio for Clayton’s management currently, if bonds are issued, if stock is issued.

Assume that after the funds are invested, EBIT amounts to $13,100. Also assume the company pays $4,400 in dividends or $4,400 in interest depending on which source of financing is used. Based on a 30 percent tax rate, determine the amount of the increase in retained earnings that would result under each financing option.(bonds, stocks)

Solutions

Expert Solution

a-1)

Current assets after issue of bonds or stock will increase by $37,000. Hence, current ratio will remain same whether funds are raised by issue of bonds or stock

Hence, current assets = 24,000 + 37,000

= $61,000

Current ratio = Current assets/Current liabilities

= 61,000/6,000

= 10.17

a-2)

(i) When funds are raised by issuing bonds

Debt = Current liabilities + Non current liabilities

= 6,000 + (40,000 + 37,000)

= 6,000 + 77,000

= $83,000

Total assets = Current assets + Non current assets

= (24,000 + 37,000) + 82,000

= 61,000 + 82,000

= $143,000

Debt to assets ratio = Debt/Total assets

= 83,000/143,000

= 0.58

(ii) When funds are raised by issuing stock

Debt = Current liabilities + Non current liabilities

= 6,000 + 40,000

= $46,000

Total assets = Current assets + Non current assets

= (24,000 + 37,000) + 82,000

= 61,000 + 82,000

= $143,000

Debt to assets ratio = Debt/Total assets

= 46,000/143,000

= 0.32

Bonds option Stock option
EBIT 13,100 13,100
Less: Interest - 4,400 0
EBT 8,700 13,100
Tax - 2,610 - 3,930
Earnings after tax 6,090 9,170
Dividend 0 - 4,400
Increase in retained earnings $6,090 $4,770

ekkarill92 answered 11 months ago
Next > < Previous

Related Solutions

Clayton Industries has the following account balances: Current assets $ 24,000 Current liabilities $ 11,000 Noncurrent...
Clayton Industries has the following account balances: Current assets $ 24,000 Current liabilities $ 11,000 Noncurrent assets 74,000 Noncurrent liabilities 60,000 Stockholders’ equity 27,000 The company wishes to raise $44,000 in cash and is considering two financing options: Clayton can sell $44,000 of bonds payable, or it can issue additional common stock for $44,000. 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...
Clayton Industries has the following account balances: Current assets $ 25,000 Current liabilities $ 15,000 Noncurrent...
Clayton Industries has the following account balances: Current assets $ 25,000 Current liabilities $ 15,000 Noncurrent assets 79,000 Noncurrent liabilities 46,000 Stockholders’ equity 43,000 The company wishes to raise $41,000 in cash and is considering two financing options: Clayton can sell $41,000 of bonds payable, or it can issue additional common stock for $41,000. 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. Compute the current...
The following account balances for the noncash current assets and current liabilities of Suffolk Company are...
The following account balances for the noncash current assets and current liabilities of Suffolk Company are available: December 31 2017 2016 Accounts receivable $43,260 $34,940 Inventory 29,860 40,010 Prepaid rent 16,550 15,230     Totals $89,670 $90,180 Accounts payable $26,410 $19,020 Income taxes payable    5,730 9,700 Interest payable   14,500 12,250     Totals $46,640 $40,970 Net income for 2017 is $38,690. Depreciation expense is $18,220. Assume that all sales and all purchases are on account. Required: 1. Prepare the Operating Activities section of the...
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...
The following is a random list showing the account balances of various assets, liabilities, revenues and...
The following is a random list showing the account balances of various assets, liabilities, revenues and expenses for Jones Painting Company at December 31, 2020, the end of its first year of operations. Accounts receivable 7,100 Acounts payable 2,500 salary expense 3,200 repair expense 700 truck 8,300 equipment 6,700 unearned revenue 3,000 cash 6,100 supplies expense 1,600 service revenue 15,800 Gasoline Expense 3,000 Salary payable 2,100 3. the Statement of owners equity would show an ending balance of A. 21,800...
A partnership has the following account balances: Cash, $95,000; Other Assets, $665,000; Liabilities, $305,000; Nixon (50...
A partnership has the following account balances: Cash, $95,000; Other Assets, $665,000; Liabilities, $305,000; Nixon (50 percent of profits and losses), $215,000; Cleveland (30 percent), $150,000; Pierce (20 percent), $90,000. The company liquidates, and $20,500 becomes available to the partners. Who gets the $20,500? Determine how much of this amount should be distributed to each partner.(Do not round intermediate calculations.)
A partnership has the following account balances: Cash, $76,000; Other Assets, $570,000; Liabilities, $258,000; Nixon (50...
A partnership has the following account balances: Cash, $76,000; Other Assets, $570,000; Liabilities, $258,000; Nixon (50 percent of profits and losses), $180,000; Cleveland (30 percent), $130,000; Pierce (20 percent), $78,000. The company liquidates, and $16,500 becomes available to the partners. Who gets the $16,500? Determine how much of this amount should be distributed to each partner. (Do not round intermediate calculations.) Nixon Cleveland Pierce Safe payments:
A partnership has the following account balances: Cash, $70,000; Other Assets, $540,000; Liabilities, $260,000; Nixon (50...
A partnership has the following account balances: Cash, $70,000; Other Assets, $540,000; Liabilities, $260,000; Nixon (50 percent of profits and losses), $170,000; Cleveland (30 percent), $110,000; Pierce (20 percent), $70,000. The company liquidates, and $8,000 becomes available to the partners. Who gets the $8,000? Determine how much of this amount should be distributed to each partner.(Do not round intermediate calculations.) Nixon Cleveland Pierce Safe payments
Loot Company has a beginning retained earnings balance of $6,000. It has the following account balances...
Loot Company has a beginning retained earnings balance of $6,000. It has the following account balances at the end of the first year of operations: Accounts Payable $37,000 Revenues $106,000 Unearned Revenues $15,000 Salaries Expense $14,000 Dividends $8,000 Utilities Expense $12,000 Accrued Expenses $13,000 Advertising Expense $10,000 Prepaid Expenses $16,000 Short-term Investments $20,000 Cash $33,000 Land $50,000 Common Stock $53,000 What is the ending balance in Retained Earnings?
Assets Liabilities Cash                               $ 6,000 Deposited with the Fed   
Assets Liabilities Cash                               $ 6,000 Deposited with the Fed    $ 4,000 Loans $ 140,000 Deposits $ 90,000 Capital    $ 60,000 Total $ 150,000 Total $ 150,000 The required reserve ratio on all deposits is 8% a. What, if any, are this bank's excess reserves? b. How much new amount of loan will this bank be able to create because of the excess reserves? c. How much new amount of loan will the entire banking system be able to create...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT