Question

It is January 2nd. Senior management of Digby meets to determine their investment plan for the year. The current long-term debt is equal to $33,862,062. They decide to fully fund a plant and equipment purchase by issuing 50,000 shares of stock plus a new bond issue. The CFO happily notes this will raise their Leverage (Assets/Equity) to a new target of 2.45. Assume the stock can be issued at yesterday's stock price $20.54.

Which of the following statements are true? (Select 2 answers)
A) Total investment for Digby will be $2,518,806
B) Total Assets will rise to $140,042,395
C) Digby bond issue will be $48,116
D) Long term debt will increase from $33,862,062 to $34,888,934
E) Digby will issue stock totaling $1,026,872
F) Digby working capital will be unchanged at $14,847,979

Answer 1

E, F

Step-by-step explanation:

1) The working capital remain unchanged as new stock issue and the the share issues are purposely to fund the purchase of plant and equipment. Please note that the components of working capital which are cash , inventory , receivable and payable are not affected by this.

2)The total share stock issued issued is close to 1,026,872. (50000*20.54)

Answer 2

A) Total investment for Digby will be $2,518,806

D) Long term debt will increase from $33,862,062 to $34,888,934

Step-by-step explanation:

The current Long-term debt is $33,862,062

Digby issues new shares of 50,000 with stock price $20.54.

50,000 shares * $20.45 = $1,027,000

Assets of Digby will rise by,

Assets / Equity = 2.45

Assets / $1,027,000 = 2.45

Assets = 2.45 * $1,027,000

Assets = $2,516,150