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 75,000 shares of stock plus a new bond issue. Assume the stock can be issued at yesterday’s stock price ($32.24) and leverage changes to 2.7. Which of the following statements are true? Select all that apply.

Select: 3

Working capital will remain the same at $12,881,160 Total liabilities will be $137,871,901 The total investment for Chester will be $19,688,961 Total assets will rise to $214,795,765 Chester will issue stock totaling $2,418,000

Answer 1

Solution as follows:

Total Assets (given) - Total Liabilities (given) = Total Stockholders' Equity (plug)

214,795,765 – 137,871,901 = 76,923,864

New stock issued = 75,000 x 32.24 = 2,418,000

Total Stockholders' Equity (above) - New stock issued (above) = Old Stock

76,923,864 - 2,418,000= 74,505,864

Total Assets / Total Stockholders' Equity = Leverage

214,795,765/ 76,923,864 = 2.79, or 2.7

Since this gives us the desired leverage figure, we can be confident of TA, TSE, & TL.

True statements are:

1) Total liabilities = 137,871,901

2) Chester will issue new stock of $2,418,000

3) Total assets will rise to $214,795,765.