Question

t 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 $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 The total investment for Digby will be $200,908,085

Working capital will remain the same at $15,821,545

Total Assets will rise to $216,637,535

Total liabilities will be $130,671,961

Digby’s long-term debt will rise by $9,000,000

Answer 1

1. Leverage is the ratio of company's debt and equity.Leverage can also refer to amount of debt a frim used to finance assets.

2. In the current senario senior management of Digby decided to fully fund plant and equipment purchase by issuing $10,000,000 in bonds. As a result of this following statements are true.

a.Company's Long term debt will rise by $9,000,000 (Reason:Digby is issuing bonds as a result of which company is entering into a contract which creates long term liability.)

b.Working capital will remain the same at $15,821,545 (Reason: as explained above,Digby is issuing bonds which creates Long term liability and buying Plant and Michinery which results in increase of Long term asset.So, there will not be any change in working capital of Digby.Working capital is excess of current assets over current liabilities of the firm)

c.Total Assets will rise to $216,637,535 (Reason: as explained in point b,company's assets will increase by $10,000,000.(assuming Total assets before purchse of Plant and Machinery was $206, 637, 535)).

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