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Assume that after the funds are invested

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Parker Company has the following account balances:

2459_264-B-A-L (2932)-1.png

The company wishes to raise $50,000 in cash, and is considering two financing options. Either it can sell $50,000 of bonds payable, or it can issue additional common stock for $50,000. To help in the decision process, Parker's management wants to determine the effects of each alternative on its current ratio and debt to assets ratio.

Required: 

a. Help Parker's management by completing the following chart:

1496_264-B-A-L (2932)-2.png

b. Assume that after the funds are invested, EBIT amounts to $60,000. Also assume the company pays $10,000 in dividends or $10,000 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.

Reference no: EM13921793

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