DeAngelo Corp.\'s projected net income is $150.0 million, its target capital str

Question

DeAngelo Corp.'s projected net income is $150.0 million, its target capital structure is 25% debt and 75% equity, and its target payout ratio is 65%. DeAngelo has more positive NPV projects than it can finance without issuing new stock, but its board of directors had decreed that it cannot issue any new shares in the foreseeable future. The CFO now wants to determine how the maximum capital budget would be affected by changes in capital structure policy and/or the target dividend payout policy. Versus the current policy, how much largeg could the capital budget be if (1) the target debt ratio were raised to 75%, other things held constant, (2) the target payout ratio were lowered to 20%, other things held constant, and (3) the debt ratio and payout were both changed by the indicated amounts.

Increase in Capital Budget

Increase Debt Lower Payout Do Both

to 75% to 20%

a. $114.0 $73.3 $333.9

b.$120.0$77.2$351.5

c. $126.4 $81.2 $370.0

d. $133.0 $85.5 $389.5

e. $140.0 $90.0 $410.0

Please show you calculations.

Explanation / Answer

e. $140.0 $90.0 $410.0 as we have retained income $120 mln, 75% debt and 25% equity capital budget = $120 mln / 0.25 = $480 mln, the increase is $480 - $70 = $410 mln;

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