5A Determining the effects of financing alternatives on ratios Erercise 10.2 omp

Question

5A Determining the effects of financing alternatives on ratios Erercise 10.2 omposite Solutions Company (CSC) has the following account balances: Current liabilities $100,000 350,000 Noncurrent liabilities 250,000 Stockholders' equity 150,000 $150,000 Current assets Noncurrent assets options C The company wishes to raise $80,000 in cash and is considering two financing options: C sell $80,000 of bonds payable, or it can issue additional common stock for $80,000. To the decision process, CSC's management wants to determine the effects of each alternati current ratio and debt to assets ratio. or it issue additional the decision process c

Explanation / Answer

1 Currently If bond are issued If Stock is issued Current ratio                  1.50                 2.30                     2.30 Debt to assets Ratio                  0.70                 0.74                     0.60 Current ratio Current assets / current liability 150000 / 100000 1.5 if bond issued Current assets will increase and non current liability also will increase Current assets Non Currentliability Now          1,50,000         2,50,000 After issue of bond          2,30,000         3,30,000 New Current ratio Current assets / current liability 230000 / 100000                  2.30 if Stock issued Current assets will increase and Stock holders equity also will increase Debt to assets Total Debts /Total Asstes Before 350000 / 500000                  0.70 After issue of bond 430000 / 580000                  0.74 After issue of Stock 350000 / 580000                  0.60 2 Option Bond Stock EBIT             60,000            60,000 Less Interest                6,000                      -   PBT             54,000            60,000 Tax 40%             21,600            24,000 PAT             32,400            36,000 Dividend                       -                 6,000 Retained Earnings             32,400            30,000

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