Question

Comp xm-It is January 2nd and senior management of Digby meets to determine their investment plan for the year. They decide to fully fund a plant and equipment purchase by issuing 75,000 shares of stock plus a new bond issue. Assume the stock can be issued at yesterday's stock price ($35.93) and leverage changes to 2.7.

Which of the following statements are true?

a) Total liabilities will be 140,879,019.
b) Total assets will rise to $220,546,428.
c) Working capital will remain the same at $14,458,329.
d) Digby will issue stock totaling $2,694,750.
e) The total investment for Digby will be $21,302,587.

Answer 1

The folowing statments are true;

(d) Digby will issue stock totaling $2,694,750.

Step-by-step explanation:

The formula for leverage ratio is total liability divided by total shareholders equity.

Since Total Liability divided by tootal shareholders qeuity = 2.7

therefore, total liability divided by (75,000 X $35.93) =2.7

total liability will be (75,000 X $35.93 X 2.7) =$ 7,275,825.

The only value extractable from this permutation will be the total stock issued which is $2,694,750.