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? Select all that apply.

Select: 3

	Total liabilities will be $139,786,639
	The total investment for Chester will be $216,169,213
	Working capital will remain the same at $18,209,633
	Chester’s long-term debt will rise by $9,000,000
	Total Assets will rise to $233,232,952

Answer 1

If Total Assets = $233,232,952; Total liabilities before = $139,786,639; New liability = $10,000,000;

Stockholders' Equity = $233,232,952 - $139,786,639 - $10,000,000 = $83,446,313

Leverage = Total Assets Total Stockholders' Equity

= $233,232,952 $83,446,313 = 2.79

Therefore, the following assumptions are correct.

a. Total liabilities will be $139,786,639;

c. Working Capital will remain the same at $18,209,633

e. Total Assets will rise to $233,232,952

We don't know the information regarding investments therefore, we can't assure of option b and it is clear from the question that the long term liability is raising by $10,000,000 so option d doesn't hold good.

Working capital remains same unless the cash is used for purchasing the equipment. Upto the date of equipment purchase, the working capital would remain same.