Question

It is January 2nd and 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 $10,000,000 in bonds. Assume the bonds are issued at face value and leverage changes to 2.7. Which of the following statements are true?

A. Working capital will remain the same at $18,964,118
B. Total Assets will rise to $235,535,291
C. Chesters' long-term debt will rise by $9,000,000
D. The total investment for Chester will be $217,192,866
E. Total liabilities will be $139,957,573

Answer 1

• A. Working capital will remain the same at $18,964,118
• C. Chesters' long-term debt will rise by $9,000,000
• E. Total liabilities will be $139,957,573

Step-by-step explanation:

You included no balance sheet for Chester so I will answer based on inference.

Option A is most likely correct because Working capital relates to Current Assets less Current liabilities so Plant and Equipment (fixed assets) and bonds (long term liabilities) will not affect it.

Total assets rising to $235,525,291 is also quite possible if the assets were previously $225,525,291 so just check for that but this is most likely correct.

Option C is wrong because the long term debt should rise by $10,000,000 which is the value of the bonds.

Option D is wrong as well as this relates to long term bonds not investment by shareholders.

Total liabilties rising is probably correct if the current figure on the balance sheet is $129,957,573 because that would mean that it increased by $10,000,000 which is the price of the bond.

So just check your given balance sheet for Options C and E for my notes and if correct, they are your answers as well as A.