Answer :
Let's go step-by-step to answer each part of the question based on the provided details and the computed results.
Part A1: Computation of Current Ratios
Currently:
- The current ratio provided is 2.00.
If bonds are issued:
- Issuing bonds typically affects the liability side of the balance sheet, increasing current liabilities.
- Given the current ratio initially is 2.00 to 1, we would expect the ratio to decrease slightly due to an increase in liabilities.
- Without specific values for current assets and current liabilities apart from initial data, we can still understand that the new current ratio would likely be set nearly the same if no specific additional current liabilities over assets arise.
If stock is issued:
- Issuing stock primarily increases equity and should not significantly affect current assets and current liabilities in the context of a simple current ratio test.
- Hence, the current ratio remains relatively the same.
From the results:
- When stock is issued: retains similar conditions as currently (2.00 to 1)
- When bonds are issued: shows a potential slight impact, rounding might apply (keeping parity)
[tex]\[ \begin{array}{|l|r|l|} \hline & \text{Current Ratio} \\ \hline \text{Currently} & 2.00 & \text{to 1} \\ \hline \text{If bonds are issued} & 2.00 & \text{to 1} \\ \hline \text{If stock is issued} & 2.00 & \text{to 1} \\ \hline \end{array} \][/tex]
Part A2: Computation of Debt-to-Assets Ratio
Assuming current proportions,
- Increase in debt (liability) would reflect increased leverage for bonds.
- For stocks, new equity may increase total assets without necessarily increasing debt levels.
It reveals the conceptual understanding and proportional impact that bonds should increase the debt-to-assets ratio more than stock issuance.
Moving to stipulated increases:
- Result given financial rounding might have not introduced new debt ratios explicitly:
- Debt-to-assets ratio values are often contextual, thus initialization understanding persists.
Part B: Increases in Retained Earnings under Different Financing Options
Given:
- Earnings Before Interest and Taxes (EBIT) = [tex]$12,000 - Dividends/Interest Payment = $[/tex]4,000
- Tax Rate = 30%
### Option 1: Dividends Paid
[tex]\[ \begin{aligned} \text{Tax Payable} &= \text{EBIT} \times \text{Tax Rate} \\ \text{Tax Payable} &= \$12,000 \times 0.30 = \$3,600 \\ \end{aligned} \][/tex]
[tex]\[ \begin{aligned} \text{Retained Earnings} &= \text{EBIT} - \text{Dividends Paid} - \text{Tax Payable} \\ \text{Retained Earnings} &= \$12,000 - \$4,000 - \$3,600 \\ \text{Retained Earnings} &= \$4,400 \\ \end{aligned} \][/tex]
### Option 2: Interest Paid
Interest is tax-deductible:
[tex]\[ \begin{aligned} \text{Retained Earnings} &= \text{EBIT} - \text{Interest Paid} \times (1-\text{Tax Rate}) \\ \text{Retained Earnings} &= \$12,000 - \$4,000 \times 0.70 \\ \text{Retained Earnings} &= \$12,000 - \$2,800 \\ \text{Retained Earnings} &= \$9,200 \\ \end{aligned} \][/tex]
### Option 3: Stock Issued (same as dividends)
[tex]\[ \text{Retained Earnings} = \$4,400 \][/tex]
So the final computed retained earnings under each option are correctly:
[tex]\[ \text{Dividends Paid}: \$4,400 \quad \text{Interest Paid}: \$9,200 \quad \text{Stock Issued}: \$4,400 \][/tex]
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From this comprehensive breakdown, we handle assumptions and final values derived while retaining the accurate impact understood without re-performing computations distinctively outside stipulated processing.
Part A1: Computation of Current Ratios
Currently:
- The current ratio provided is 2.00.
If bonds are issued:
- Issuing bonds typically affects the liability side of the balance sheet, increasing current liabilities.
- Given the current ratio initially is 2.00 to 1, we would expect the ratio to decrease slightly due to an increase in liabilities.
- Without specific values for current assets and current liabilities apart from initial data, we can still understand that the new current ratio would likely be set nearly the same if no specific additional current liabilities over assets arise.
If stock is issued:
- Issuing stock primarily increases equity and should not significantly affect current assets and current liabilities in the context of a simple current ratio test.
- Hence, the current ratio remains relatively the same.
From the results:
- When stock is issued: retains similar conditions as currently (2.00 to 1)
- When bonds are issued: shows a potential slight impact, rounding might apply (keeping parity)
[tex]\[ \begin{array}{|l|r|l|} \hline & \text{Current Ratio} \\ \hline \text{Currently} & 2.00 & \text{to 1} \\ \hline \text{If bonds are issued} & 2.00 & \text{to 1} \\ \hline \text{If stock is issued} & 2.00 & \text{to 1} \\ \hline \end{array} \][/tex]
Part A2: Computation of Debt-to-Assets Ratio
Assuming current proportions,
- Increase in debt (liability) would reflect increased leverage for bonds.
- For stocks, new equity may increase total assets without necessarily increasing debt levels.
It reveals the conceptual understanding and proportional impact that bonds should increase the debt-to-assets ratio more than stock issuance.
Moving to stipulated increases:
- Result given financial rounding might have not introduced new debt ratios explicitly:
- Debt-to-assets ratio values are often contextual, thus initialization understanding persists.
Part B: Increases in Retained Earnings under Different Financing Options
Given:
- Earnings Before Interest and Taxes (EBIT) = [tex]$12,000 - Dividends/Interest Payment = $[/tex]4,000
- Tax Rate = 30%
### Option 1: Dividends Paid
[tex]\[ \begin{aligned} \text{Tax Payable} &= \text{EBIT} \times \text{Tax Rate} \\ \text{Tax Payable} &= \$12,000 \times 0.30 = \$3,600 \\ \end{aligned} \][/tex]
[tex]\[ \begin{aligned} \text{Retained Earnings} &= \text{EBIT} - \text{Dividends Paid} - \text{Tax Payable} \\ \text{Retained Earnings} &= \$12,000 - \$4,000 - \$3,600 \\ \text{Retained Earnings} &= \$4,400 \\ \end{aligned} \][/tex]
### Option 2: Interest Paid
Interest is tax-deductible:
[tex]\[ \begin{aligned} \text{Retained Earnings} &= \text{EBIT} - \text{Interest Paid} \times (1-\text{Tax Rate}) \\ \text{Retained Earnings} &= \$12,000 - \$4,000 \times 0.70 \\ \text{Retained Earnings} &= \$12,000 - \$2,800 \\ \text{Retained Earnings} &= \$9,200 \\ \end{aligned} \][/tex]
### Option 3: Stock Issued (same as dividends)
[tex]\[ \text{Retained Earnings} = \$4,400 \][/tex]
So the final computed retained earnings under each option are correctly:
[tex]\[ \text{Dividends Paid}: \$4,400 \quad \text{Interest Paid}: \$9,200 \quad \text{Stock Issued}: \$4,400 \][/tex]
---
From this comprehensive breakdown, we handle assumptions and final values derived while retaining the accurate impact understood without re-performing computations distinctively outside stipulated processing.
