Question

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 ($32.99) and leverage changes to 2.8. Which of the following statements are true? Select all that apply. Select: 3

A. Working capital will remain the same at $11,700,538

B. Digby will issue stock totaling $2,474,250

C. Total liabilities will be $146,134,802

D. The total investment for Digby will be $24,479,152

E. Total assets will rise to $226,620,137

Answer 1

Which of the following statements are true? Select all that apply.

A. Working capital will remain the same at $11,700,538

B. Digby will issue stock totaling $2,474,250

C. Total liabilities will be $146,134,802

D. The total investment for Digby will be $24,479,152

E. Total assets will rise to $226,620,137

Digby will issue stock totaling = number of stocks * issue price

= 75,000 * $32.99 = $2,474,250

Therefore statement B. is true

Now assume that the statements C & E are true and analysis it back

We know that; Shareholders equity = Total Assets - Total Liabilities

Where,

Total assets = $226,620,137

Total liabilities = $146,134,802

Therefore,

Shareholder’s equity = $226,620,137 - $146,134,802

Shareholder’s equity = $80,485,335

Leverage of the company is changes to 2.8

But

Leverage = Total Assets/Total stockholder equity

= $226,620,137/ $80,485,335

= 2.8

Therefore, these statements are true

Other statements cannot be verified with given information therefore true statements are -

B. Digby will issue stock totaling $2,474,250

C. Total liabilities will be $146,134,802

E. Total assets will rise to $226,620,137