oints 15 2006 Capsim Management Simulations Inc It is Januar

oints: 15 @2006 Capsim Management Simulations, Inc 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 th will raise their Leverage (Fassets/equity) to a new target of 2.7. Assume the stock can be issued at yesterday\'s stock price ($39.89). Which of the following statements are true? Check all that apply. Select 3 Save Answer ? Total Assets will rise to $229,455,000 ? The Baldwin bond issue will be s3390650 Baldwin will issue stock totaling $1,994,500 ? Long term debt will increase from $82,978,515 to S84973,015 Total investment for Baldwin will be $5,385,150 The Baldwin Working Capital will be unchanged at $17,234 Comp-XM®. Capsin?and Capsim.com® table Business Learning

Solution

Let us first number the options for understandibility. So number the options as a,b, c, d, e and f.

Now,

Total Number of Shares which will be issued= 50,000 * $39.89= $19,94,500 and hence option (c) holds true

Next, they have given that the leverage will increase to 2.7 and the formulae for leverage is ASSETS/EQUITY= 2.7

Now, we have already found out Equity which is $ 19,94,500 and Leverage is 2.7, therefore Total Assets comes to $19,94,500 * 2.7 = $ 53,85,150 and hence option (e) holds true (with the assumption that only the Investment is the Asset with the company)

Now assuming that the Bonds and the Equity is the only liability on the Liability side of the Balance sheet, if the total assets are $ 53,85,150 and the shares issued are of value $ 19,94,500, then value of Bonds will be $ 33,90,650 (ie. 53,85,150-19,94,500) and hence option (b) also holds true.

Also it has been assumed that there are no retained earnings in Equity

Hence Option B, C and E hold true