1. Bankston Corporation forecasts that if all of its existing financial policies
ID: 2676139 • Letter: 1
Question
1. Bankston Corporation forecasts that if all of its existing financial policies are followed, its proposed capital budget would be so large that it would have to issue new common stock. Since new stock has a higher cost than retained earnings, Bankston would like to avoid issuing new stock. Which of the following actions would REDUCE its need to issue new common stock?a. Increase the dividend payout ratio for the upcoming year.
b. Increase the percentage of debt in the target capital structure.
c. Increase the proposed capital budget.
d. Reduce the amount of short-term bank debt in order to increase the current ratio.
e. Reduce the percentage of debt in the target capital structure.
Explanation / Answer
In order to reduce the need of issue of new stock the comapny shall :
Increase the percentage of debt in the target capital structure because issuing of debt is less costly for the company.
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