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E10-22A Husky Industries

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Exercise 10-22A Determining the effects of financing alternatives on ratios
Husky Industries has the following account balances:

Current assets.......... $ 30,000 Current liabilities ........$15,000
Noncurrent assets....... 120,000 Noncurrent liabilities... 75,000
Stockholders’ equity... 60,000

The company wishes to raise $40,000 in cash, and is considering two financing options. Either it
can sell $40,000 of bonds payable, or it can issue additional common stock for $40,000. To help
in the decision process, Husky's management wants to determine the effects of each alternative
on its current ratio and debt to assets ratio.

Required
a. Help Husky's management by completing the following chart.
b. Assume that after the funds are invested, EBIT amounts to $12,000. Also assume the company
pays $4,000 in dividends or $4,000 in interest depending on which source of financing
is used. Based on a 30 percent tax rate, determine the amount of the increase in retained
earnings that would result under each financing option.

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