It is January 2nd. Senior management of Baldwin meets to determine their investm

Question

It is January 2nd. Senior management of Baldwin 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 2.7. Assume the stock can be issued at yesterday’s stock price ($41.76). Which of the following statements are true? Check all that apply.

CHOOSE 3

The Baldwin bond issue will be $3,549,600 Total Assets will rise to $233,356,000 Long term debt will increase from $83,635,560 to $85,723,560 Baldwin will issue stock totaling $2,088,000 Total investment for Baldwin will be $5,637,600 The Baldwin Working Capital will be unchanged at $17,469

Explanation / Answer

Leverage = Assets / Equity = 2.70 times

That is D+E/ E= 2.70 or D/E+1=2.70 or D/E= 1.70 times

Equity amount = 50000× 41.76= $2088000

Debt amount= 1.70×2088000= $3549600

Selected statements:

1.The Baldwin bond issue will be $3549600

2.Baldwin will issue stock totaling $ 2088000

3.Total investment of Baldwin $ 56337600.

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