Final answer:
Senior management of Chester decides to fully fund a plant and equipment purchase by issuing stock and a new bond issue. The term 'leverage' refers to the ability to issue more stock than normal using existing stock as collateral. Therefore the correct answer is They decide to fully fund a plant and equipment purchase by issuing 75,000 shares of stock plus a new bond issue.
Step-by-step explanation:
When senior management of Chester 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 and a new bond issue. The stock can be issued at yesterday's stock price of $36.28. The leverage changes to 2.7.
With leverage of 2.7, the company can issue more stock than they normally could by using existing stock as collateral. For example, if someone has 500 shares of General Electric valued at $100 per share, they would have an investment valued at $50,000. By using leverage, they could use those shares as collateral for a loan of another $200,000 and purchase another 2,000 shares of GE stock.
In this case, the company's decision to fully fund the plant and equipment purchase by issuing stock and a new bond issue is a financing decision that involves both equity (stock) and debt (bond).