1. It is January 2nd. Senior management of Digby meets to determine their invest
ID: 2483393 • Letter: 1
Question
1. 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 2.34. Assume the stock can be issued at yesterday's stock price $19.71. Which of the following statements are true? (Select 2 answers)
Digby will issue stock totaling $985,445
Total investment for Digby will be $2,301,831
Long term debt will increase from $35,473,142 to $36,458,587
Total Assets will rise to $151,301,570
Digby working capital will be unchanged at $24,181,971
Digby bond issue will be $43,433
2. Cake is a product of the Chester Company. Chester's sales forecast for Cake is 1,451 in the Americas region. Chester wants to have an extra 10% on hand above their forecasted units in case sales are better than expected. (They would risk the possibility of excess inventory carrying charges rather than risk lost profits on a stock out.) Taking current inventory into account, what will Cake's Fulfillment After Adjustment have to be in order to have a 10% reserve of units available for sale? All numbers in thousands (000).
1,597 units
1,227 units
1,451 units
1,082 units
3. Baldwin plant has a capacity of 4,000,000 and an automation level of 4.5. Last year they produced 3,575,401 units of Baker - producing 2,475,401 and outsourcing 1,100,000 units.
Which of the following would help Baldwin minimize capital spending this year?
Purchase 1,600,000 units of capacity
Raise Automation to 7.0
Purchase 2,100,000 units of capacity
Outsource 1,600,000 units of capacity
Explanation / Answer
1)
Answers:
a) Digby will issue stock totaling $985,445
b) Digby working capital will be unchanged at $24,181,971
Issue of stock = 50000 shares x $19.71/share = $985500
As fixed asssets are being purchased in excehnge of issue of stock and bond (non current liabilites), the working capital will not be affected by this transaction (Working capital = current assets - current liabilites), as the current assets and current liabilites will remain same.
2) Answer: 1597 units
Forecasted sales = 1451 units
The required inventory = 1451 + 10% = 1596.1 units = 1597 units
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