The company wishes to raise $42,000 in cash and is considering two financing opt
ID: 2535765 • Letter: T
Question
The company wishes to raise $42,000 in cash and is considering two financing options: CSC can sell $42,000 of bonds payable, or it can issue additional common stock for $42,000. 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.
Compute the current ratio for CSC’s management. (Round your answers to 2 decimal places.)
Compute the debt to assets ratio for CSC’s management. (Round your answers to 1 decimal place.)
Assume that after the funds are invested, EBIT amounts to $14,800. Also assume the company pays $4,600 in dividends or $4,600 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.
Composite Solutions Company (CSC) has the following account balances:
Explanation / Answer
Current Ratio = Current Assets / Liabilities
Answer(1): Presently Current Ratio: 27000 / 10000 = 2.7
If Company sells bonds payable then Cash will increase and Bonds payable will create new long term liabilities. There will be no effect on current liabilities.
Current ratio: (27000 + 42000) / 10000 = 6.9
If company issues common stocks then cash will increase and shareholder's equity will increase.
Current Ratio: (27000 + 42000) / 10000 = 6.9
Answer(2): Debt to Asset ratio = Total Debt / Total Assets
Total debt: 10000 + 44000 = 54000
Total Assets: 27000 + 83000 = 110000
Presently Debt to Asset ratio: 54000 / 110000 = .49
When issued bonds then Debt to Asset ratio = (54000 + 42000) / (110000 + 42000)
Debt to Asset ratio = .63
When issued common stocks then Debt to Asset ratio = (54000 + 42000) / (110000 + 42000)
Debt to Asset ratio = .63