Composite Solutions Company (CSC) has the following account balances: Current as

Question

Composite Solutions Company (CSC) has the following account balances: Current assets $ 25,000 Current liabilities $ 9,000 Noncurrent assets 77,000 Noncurrent liabilities 45,000 Stockholders’ equity 48,000 The company wishes to raise $33,000 in cash and is considering two financing options: CSC can sell $33,000 of bonds payable, or it can issue additional common stock for $33,000. 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 $12,200. 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 iretained earnings that would result under each financing option.

Explanation / Answer

1.

Current Ratio = 25000/9000 = 2.78

2.

Debt to Assets Ratio = 54000/102000 = 0.53

3.

Option 1 : Issue of common Stock

EBIT = 12200

PAT = 8540(12200*0.7)

Earnings available for equity shareholders or Retained earnings = 8540-4400 = 4140

Option 2 : Issue of Bonds

EBIT = 12200

EBT = 7800

PAT = (7800*.7) = 5460 = Retained Earnings

Issuing of bonds will be better option

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