Winchester Industries has the following account balances: Current Assets Noncurr

Question

Winchester Industries has the following account balances: Current Assets Noncurrent Assets Current Liabilities Noncurrent Liabilities Stockholders' Equi $20,000 80,000 10,000 50,000 40,000 The company wishes to raise $40,000 in cash and is considering two financing options. Either it can sel $40,000 of bonds payable, or it can issue $40,000 of additional common stock. Which of the following statements is correct regarding how the financing alternatives will affect its ratios? O The debt to assets ratio will decrease if stock is issued. The current ratio will decrease if stock is issued. O The current ratio is not affected if stock is issued. O The debit to assets ratio will decrease if bonds are issued.

Explanation / Answer

THE DEBT TO ASSETS RATIO (DEBT/TOTAL ASSETS) WILL DECREASE IF STOCK IS ISSUED - CORRECT. REASON: CASH WILL BE RECEIVED SO ASSETS (DENOMINATOR) WILL INCREASE AND DEBT (NUMERATOR) WILL BE CONSTANT AS NO DEBT IS ISSUED. SO DEBT TO ASSETS RATIO WILL DECREASE.

CURRENT RATIO (CURRENT ASSETS/CURRENT LIABILITIES)WILL INCRESE AS A RESULT OF ISSUE OF COMMON STOCK BECAUSE CURRENT ASSETS WILL INCRESE(CASH) AND CURRENT LIABILITIES ARE SAME. SO B AND C ARE INCORRECT.

THE DEBT TO ASSETS RATIO WILL INCREASE IF BONDS ARE ISSUED.

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