CompUSA Corp.'s projected net income is $180 million, its current target capital structure is 25% debt and 75% equity, and its current target dividend payout ratio is 35%. CompUSA has more positive NPV projects than it can finance without issuing new stock, but its board of directors decided 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. Compared to the current policy, how much increase could the total capital budget be if the target payout ratio is lowered to 20% and the target proportion of debt is raised to 45% debt and 55% equity at the same time, net income is held constant?
CompUSA Corp.'s projected net income is $180 million, its current target capital structure is 25% debt and 75% equity, and its current target dividend payout ratio is 35%. CompUSA has more positive NPV projects than it can finance without issuing new stock, but its board of directors decided 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. Compared to the current policy, how much increase could the total capital budget be if the target payout ratio is lowered to 20% and the target proportion of debt is raised to 45% debt and 55% equity at the same time, net income is held constant?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:CompUSA Corp.'s projected net income is $180 million, its current target
capital structure is 25% debt and 75% equity, and its current target
dividend payout ratio is 35%. CompUSA has more positive NPV projects
than it can finance without issuing new stock, but its board of directors
decided 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. Compared to the current policy, how much increase could
the total capital budget be if the target payout ratio is lowered to 20% and
the target proportion of debt is raised to 45% debt and 55% equity at the
same time, net income is held constant?
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