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Bernie’s Corporation has a capital budget of $2.25 million. The company wants to maintain a target...

Bernie’s Corporation has a capital budget of $2.25 million. The company wants to maintain a target capital structure which is 70% debt and 30% equity. The company forecasts that its net income this year will be $800,000.

a. If the firm uses a payout ratio of 30%, what dividend will Reed pay?

b. How much will be added to retained earnings?

c. If the company wishes to maintain its debt-equity ratio to finance the capital budget, how much debt must the firm issue?

d. How much equity must the firm issue?

Expert Solution

a)Amount of dividend = Net income *payout ratio

= 800000 * 30%

= $ 240000

b)Addition to retained earning = Net income -Dividend paid

= 800000 - 240000

= 560000

c)Debt issue =capital budget *% of debt

= 2250000* 70%

= 1575000

d)Equity issue = [capital budget *% of equity ] -Addition to retained earning

=[2250000*30%] - 560000

= 675000-560000

= 115000

jeff jeffy answered 2 years ago

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