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 2.48. Assume the stock can be issued at yesterday's stock price $20.46. Which of the following statements are true?

a. Digby working capital will be unchanged at $17,929,457
b. Total investment for Digby will be $2,721,439
c. Digby will issue stock totaling $1,129,499
d. Digby bond issue will be $46,377
e. Long term debt will increase from $33,575,852 to $34,705,351
f. Total Assets will rise to $145,921,995

Answer 1

• Digby will issue stock totaling $1,023,000
• Long term debt will increase from $33,575,852 to $‭34,598,852‬

Step-by-step explanation:

50,000 shares were issued at $20.46.

This means the total raised from stock sales were:

= 50,000 * 20.46

= $‭1,023,000‬

Long term debt will increase by:

= Debt + New issue

= 33,575,852 + 1,023,000

= $‭34,598,852‬

Note: The options listed are most probably for a variant of this question. Also, Stock issues are considered equity but for the sake of this question are considered Long term debt.