A firm finances with both bonds and common equity, but does not wish to issue an

Question

A firm finances with both bonds and common equity, but does not wish to issue any new common stock during the coming year due to sub-optimal market conditions. It has committed to maintaining the dividend at the projected level. Given these constraints and the following information, what percentage of the capital budget must be financed with debt $750,000 Projected capital budget Common shares outstanding Nominal cost of debt State + federal tax rate Projected dividend per share Projected EPS 500,000 $3.00 $4.00 :: Paragraph B 1 ::-·-

Explanation / Answer

Earning per Share = 4.0

Dividend per Share = 3.0

So earnings retained per share =1.0

No. of shares 50000

So retained earnings available to be used for financing capital project is 1 x 50000=50000

Total capital project cost =750000

Financed through debt =750000-50000=25000

%Financed =25000/75000=33.33%

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.