Composite Solutions Company (CSC) has the following account belances Current ass
ID: 2598324 • Letter: C
Question
Composite Solutions Company (CSC) has the following account belances Current assets Noncurrent assets $28,000 Current liabilities S10,000 70,000 Noncurrent lisbilities 43,000 Stockholders equity 45,000 The company wishes to raise S43,000 in cash and is considemg two fir ancing oplons CSC can sell $43,000 of bonds payable, or it can issue additional common stock for $43,000. 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 decirmal places.) Currenty If bonds are issued If stock is issued to 1 to 1 to 1 a-2. Compute the debt to assets ratio for CSC's management (Round your answers to 1 decimal place.) Ratio Currently If bonds are issued If stock is issued b. Assume that after the funds are invested, EBIT amounts to $16.400 Also assume the company $3,200 in dividends or $3,200 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. Bonds Stock Hints References eBook & Resources Hint#1Explanation / Answer
a.1: current ratio = current assets / current liabilities
= 28,000 / 10,000
=2.8
Current ratio if bonds issued = 28,000+ 43,000 / 10,000 = 7.1
Current ratio if stock issued = 28,000+ 43,000 /10,000 = 7.1
a.2. Debt to asset ratio = Total debt / total assets
= 10,000 +43,000 / 28,000+ 70,000
= 53,000 / 98,000 = 0.54 = 54%
If bonds issued = 53,000+ 43,000 / 98,000 + 43,000 = 0.68= 68%
If stock issued = 53,000 + 43,000 / 98,000 = 0.97 = 97%
b. Computation of additional retained earnings:
If bonds issued
If stock issued
EBIT
16,400
16,400
Less: interest
(3,200)
-
EBT
13,200
16,400
Less: tax at 40%
(5,280)
(6,560)
EAT
7,920
9,840
Less: dividend
-
(3,200)
Net income transferred to retained earnings (additional retained earnings)
7,920
6,640
If bonds issued
If stock issued
EBIT
16,400
16,400
Less: interest
(3,200)
-
EBT
13,200
16,400
Less: tax at 40%
(5,280)
(6,560)
EAT
7,920
9,840
Less: dividend
-
(3,200)
Net income transferred to retained earnings (additional retained earnings)
7,920
6,640
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