Question

It is January 2nd. 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 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 2.8. Assume the stock can be issued at yesterday’s stock price ($29.61). Which of the following statements are true? Check all that apply.

Select: 3

Digby will issue stock totaling $1,480,500

Long term debt will increase from $82,739,588 to $84,220,088

The Digby Working Capital will be unchanged at $14,333

Total Assets will rise to $220,176,000

Total investment for Digby will be $4,145,400

The Digby bond issue will be $2,664,900

Answer 1

The correct statements are ;

Digby will issue stock totalling $1,480,500

Total investment for Digby will be $4,145,400

The Digby bond issue will be $2,664,900

Calculations

Issue of stock

Issue of stock = Number of shares issued x Price per share

= 50,000 shares x $29.61 per share

= $1,480,500

Total investment for Digby

Leverage ratio = Total investment / Total equity

2.80 = Total investment / $1,480,500

Total investment = $1,480,500 x 2.80

Total investment = $4,145,400

New Bond issued by Digby

New Bond issued by Digby = Total investment – Total equity

= $4,145,400 - $1,480,500

= $2,664,900