Amount of retained earnings needed by company K to fund its capital budget.

Question

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Answer 1

Question

Chapter 14, Problem 11P

a)

Summary Introduction

To determine: Amount of retained earnings needed by company K to fund its capital budget.

a)

Expert Solution

Explanation of Solution

Given information:

Capital budget is $15,000,000

Net income is $11 million,

DPS dividend per share is $2,

Outstanding shares 1 million,

Capital structure is 30% debt and 70% equity.

Calculation of retained earnings:

Retained earnings=$15,000,000×0.70=$10,500,000

Therefore, retained earnings needed is amounted to $10,500,000

b)

Summary Introduction

To determine: Dividend per share (DPS) and pay-out ratio.

b)

Expert Solution

Explanation of Solution

Based on the residual dividend model, the amount $500,000 ($11,000,000-$10,500,000) is available for dividends.

Calculation of dividend per share:

DPS=Dividends availableOutstanding shares=$500,0001,000,000=$0.50

Therefore, dividend per share is $0.50

Calculation of pay-out ratio:

Pay-out ratio=Dividends availableNet income=$500,000$11,000,000=4.55%

Therefore, pay-out ratio is 4.55%

c)

Summary Introduction

To determine: Amount of retained earnings needed by company K to fund its capital budget, if it maintains $2 DPS for next year.

c)

Expert Solution

Explanation of Solution

Calculation of retained earnings:

Retained earnings available=$11,000,000−$2(1,000,000)=$11,000,000−$2,000,000=$9,000,000

Therefore, retained earnings available is amounted to $9,000,000

d)

Summary Introduction

To determine: Whether company maintains its current capital structure with its DPS and maintain $15 million capital budget without raising new common stock.

d)

Expert Solution

Explanation of Solution

Person X views that, company does not maintain because, if it maintains $2 DPS, only $9 million of retained earnings is available for capital projects. However, if the firm is to keep up its current capital structure of $10.5 million of equity is needed. This may necessitate the company to issue $1.5 million of common stock.

e)

Summary Introduction

To determine: Portion of current year capital budget could have to be financed by debt.

e)

Expert Solution

Explanation of Solution

Retained earnings available is $9,000,000

Calculation of Capital budget financed with Retained earnings:

Percentage of capital budget=Retained earings availablecapital budget=$9,000,000$15,000,000=60%

Therefore, percentage of capital budget financed by retained earnings is 60%

Calculation of Capital budget financed with debt:

Percentage of capital budget=Debt availablecapital budget=$6,000,000$15,000,000=40%

Therefore, percentage of capital budget financed by debt is 40%

f)

Summary Introduction

To determine: External (new) equity needed.

f)

Expert Solution

Explanation of Solution

Equity needed=$15,000,000×0.70=$10,500,000

Calculation of retained earnings:

Retained earnings available=$11,000,000−$2(1,000,000)=$11,000,000−$2,000,000=$9,000,000

Therefore, retained earnings available is amounted to $9,000,000

Calculation of external equity needed:

External equity needed=$10,500,000−$9,000,000=$1,500,000

Therefore, external (new) equity needed is $1,500,000

g)

Summary Introduction

To determine: Company’s capital budget for next year.

g)

Expert Solution

Explanation of Solution

Calculation of retained earnings:

Retained earnings available=$11,000,000−$2(1,000,000)=$11,000,000−$2,000,000=$9,000,000

Therefore, retained earnings available is amounted to $9,000,000

Retained earnings availability is equals the required equity to find new capital budget.

Calculation of capital budget using required equity:

Required equity=Capital budget(Target equity ratio)$9,000,000=Capital budget(0.7)Capital budget=$12,857,143

Hence, capital budget is $12,857,143

Therefore, if Company R cuts its capital budget from $15 million to $12.86 million, it will maintain its DPS $2.00, its current capital structure and still follow its residual dividend policy.

h)

Summary Introduction

To determine: Actions taken by company when its forecasted retained earnings are less than retained earnings required.

h)

Expert Solution

Explanation of Solution

Company can take any one of the following four actions,

New issue of common stock,
Cuts its capital budget,
Company cuts the dividends,
Change the capital structure by using more debt funds.

Company should realize that every of these actions is not while not consequences to its cost of capital, stock price or both.

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Answer 2

Question

Chapter 14, Problem 11P

a)

Summary Introduction

To determine: Amount of retained earnings needed by company K to fund its capital budget.

a)

Expert Solution

Explanation of Solution

Given information:

Capital budget is $15,000,000

Net income is $11 million,

DPS dividend per share is $2,

Outstanding shares 1 million,

Capital structure is 30% debt and 70% equity.

Calculation of retained earnings:

Retained earnings=$15,000,000×0.70=$10,500,000

Therefore, retained earnings needed is amounted to $10,500,000

b)

Summary Introduction

To determine: Dividend per share (DPS) and pay-out ratio.

b)

Expert Solution

Explanation of Solution

Based on the residual dividend model, the amount $500,000 ($11,000,000-$10,500,000) is available for dividends.

Calculation of dividend per share:

DPS=Dividends availableOutstanding shares=$500,0001,000,000=$0.50

Therefore, dividend per share is $0.50

Calculation of pay-out ratio:

Pay-out ratio=Dividends availableNet income=$500,000$11,000,000=4.55%

Therefore, pay-out ratio is 4.55%

c)

Summary Introduction

To determine: Amount of retained earnings needed by company K to fund its capital budget, if it maintains $2 DPS for next year.

c)

Expert Solution

Explanation of Solution

Calculation of retained earnings:

Retained earnings available=$11,000,000−$2(1,000,000)=$11,000,000−$2,000,000=$9,000,000

Therefore, retained earnings available is amounted to $9,000,000

d)

Summary Introduction

To determine: Whether company maintains its current capital structure with its DPS and maintain $15 million capital budget without raising new common stock.

d)

Expert Solution

Explanation of Solution

Person X views that, company does not maintain because, if it maintains $2 DPS, only $9 million of retained earnings is available for capital projects. However, if the firm is to keep up its current capital structure of $10.5 million of equity is needed. This may necessitate the company to issue $1.5 million of common stock.

e)

Summary Introduction

To determine: Portion of current year capital budget could have to be financed by debt.

e)

Expert Solution

Explanation of Solution

Retained earnings available is $9,000,000

Calculation of Capital budget financed with Retained earnings:

Percentage of capital budget=Retained earings availablecapital budget=$9,000,000$15,000,000=60%

Therefore, percentage of capital budget financed by retained earnings is 60%

Calculation of Capital budget financed with debt:

Percentage of capital budget=Debt availablecapital budget=$6,000,000$15,000,000=40%

Therefore, percentage of capital budget financed by debt is 40%

f)

Summary Introduction

To determine: External (new) equity needed.

f)

Expert Solution

Explanation of Solution

Equity needed=$15,000,000×0.70=$10,500,000

Calculation of retained earnings:

Retained earnings available=$11,000,000−$2(1,000,000)=$11,000,000−$2,000,000=$9,000,000

Therefore, retained earnings available is amounted to $9,000,000

Calculation of external equity needed:

External equity needed=$10,500,000−$9,000,000=$1,500,000

Therefore, external (new) equity needed is $1,500,000

g)

Summary Introduction

To determine: Company’s capital budget for next year.

g)

Expert Solution

Explanation of Solution

Calculation of retained earnings:

Retained earnings available=$11,000,000−$2(1,000,000)=$11,000,000−$2,000,000=$9,000,000

Therefore, retained earnings available is amounted to $9,000,000

Retained earnings availability is equals the required equity to find new capital budget.

Calculation of capital budget using required equity:

Required equity=Capital budget(Target equity ratio)$9,000,000=Capital budget(0.7)Capital budget=$12,857,143

Hence, capital budget is $12,857,143

Therefore, if Company R cuts its capital budget from $15 million to $12.86 million, it will maintain its DPS $2.00, its current capital structure and still follow its residual dividend policy.

h)

Summary Introduction

To determine: Actions taken by company when its forecasted retained earnings are less than retained earnings required.

h)

Expert Solution

Explanation of Solution

Company can take any one of the following four actions,

New issue of common stock,
Cuts its capital budget,
Company cuts the dividends,
Change the capital structure by using more debt funds.

Company should realize that every of these actions is not while not consequences to its cost of capital, stock price or both.

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Answer 3

Question

Chapter 14, Problem 11P

a)

Summary Introduction

To determine: Amount of retained earnings needed by company K to fund its capital budget.

a)

Expert Solution

Explanation of Solution

Given information:

Capital budget is $15,000,000

Net income is $11 million,

DPS dividend per share is $2,

Outstanding shares 1 million,

Capital structure is 30% debt and 70% equity.

Calculation of retained earnings:

Retained earnings=$15,000,000×0.70=$10,500,000

Therefore, retained earnings needed is amounted to $10,500,000

b)

Summary Introduction

To determine: Dividend per share (DPS) and pay-out ratio.

b)

Expert Solution

Explanation of Solution

Based on the residual dividend model, the amount $500,000 ($11,000,000-$10,500,000) is available for dividends.

Calculation of dividend per share:

DPS=Dividends availableOutstanding shares=$500,0001,000,000=$0.50

Therefore, dividend per share is $0.50

Calculation of pay-out ratio:

Pay-out ratio=Dividends availableNet income=$500,000$11,000,000=4.55%

Therefore, pay-out ratio is 4.55%

c)

Summary Introduction

To determine: Amount of retained earnings needed by company K to fund its capital budget, if it maintains $2 DPS for next year.

c)

Expert Solution

Explanation of Solution

Calculation of retained earnings:

Retained earnings available=$11,000,000−$2(1,000,000)=$11,000,000−$2,000,000=$9,000,000

Therefore, retained earnings available is amounted to $9,000,000

d)

Summary Introduction

To determine: Whether company maintains its current capital structure with its DPS and maintain $15 million capital budget without raising new common stock.

d)

Expert Solution

Explanation of Solution

Person X views that, company does not maintain because, if it maintains $2 DPS, only $9 million of retained earnings is available for capital projects. However, if the firm is to keep up its current capital structure of $10.5 million of equity is needed. This may necessitate the company to issue $1.5 million of common stock.

e)

Summary Introduction

To determine: Portion of current year capital budget could have to be financed by debt.

e)

Expert Solution

Explanation of Solution

Retained earnings available is $9,000,000

Calculation of Capital budget financed with Retained earnings:

Percentage of capital budget=Retained earings availablecapital budget=$9,000,000$15,000,000=60%

Therefore, percentage of capital budget financed by retained earnings is 60%

Calculation of Capital budget financed with debt:

Percentage of capital budget=Debt availablecapital budget=$6,000,000$15,000,000=40%

Therefore, percentage of capital budget financed by debt is 40%

f)

Summary Introduction

To determine: External (new) equity needed.

f)

Expert Solution

Explanation of Solution

Equity needed=$15,000,000×0.70=$10,500,000

Calculation of retained earnings:

Retained earnings available=$11,000,000−$2(1,000,000)=$11,000,000−$2,000,000=$9,000,000

Therefore, retained earnings available is amounted to $9,000,000

Calculation of external equity needed:

External equity needed=$10,500,000−$9,000,000=$1,500,000

Therefore, external (new) equity needed is $1,500,000

g)

Summary Introduction

To determine: Company’s capital budget for next year.

g)

Expert Solution

Explanation of Solution

Calculation of retained earnings:

Retained earnings available=$11,000,000−$2(1,000,000)=$11,000,000−$2,000,000=$9,000,000

Therefore, retained earnings available is amounted to $9,000,000

Retained earnings availability is equals the required equity to find new capital budget.

Calculation of capital budget using required equity:

Required equity=Capital budget(Target equity ratio)$9,000,000=Capital budget(0.7)Capital budget=$12,857,143

Hence, capital budget is $12,857,143

Therefore, if Company R cuts its capital budget from $15 million to $12.86 million, it will maintain its DPS $2.00, its current capital structure and still follow its residual dividend policy.

h)

Summary Introduction

To determine: Actions taken by company when its forecasted retained earnings are less than retained earnings required.

h)

Expert Solution

Explanation of Solution

Company can take any one of the following four actions,

New issue of common stock,
Cuts its capital budget,
Company cuts the dividends,
Change the capital structure by using more debt funds.

Company should realize that every of these actions is not while not consequences to its cost of capital, stock price or both.

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Answer 4

Question

Chapter 14, Problem 11P

a)

Summary Introduction

To determine: Amount of retained earnings needed by company K to fund its capital budget.

a)

Expert Solution

Explanation of Solution

Given information:

Capital budget is $15,000,000

Net income is $11 million,

DPS dividend per share is $2,

Outstanding shares 1 million,

Capital structure is 30% debt and 70% equity.

Calculation of retained earnings:

Retained earnings=$15,000,000×0.70=$10,500,000

Therefore, retained earnings needed is amounted to $10,500,000

b)

Summary Introduction

To determine: Dividend per share (DPS) and pay-out ratio.

b)

Expert Solution

Explanation of Solution

Based on the residual dividend model, the amount $500,000 ($11,000,000-$10,500,000) is available for dividends.

Calculation of dividend per share:

DPS=Dividends availableOutstanding shares=$500,0001,000,000=$0.50

Therefore, dividend per share is $0.50

Calculation of pay-out ratio:

Pay-out ratio=Dividends availableNet income=$500,000$11,000,000=4.55%

Therefore, pay-out ratio is 4.55%

c)

Summary Introduction

To determine: Amount of retained earnings needed by company K to fund its capital budget, if it maintains $2 DPS for next year.

c)

Expert Solution

Explanation of Solution

Calculation of retained earnings:

Retained earnings available=$11,000,000−$2(1,000,000)=$11,000,000−$2,000,000=$9,000,000

Therefore, retained earnings available is amounted to $9,000,000

d)

Summary Introduction

To determine: Whether company maintains its current capital structure with its DPS and maintain $15 million capital budget without raising new common stock.

d)

Expert Solution

Explanation of Solution

Person X views that, company does not maintain because, if it maintains $2 DPS, only $9 million of retained earnings is available for capital projects. However, if the firm is to keep up its current capital structure of $10.5 million of equity is needed. This may necessitate the company to issue $1.5 million of common stock.

e)

Summary Introduction

To determine: Portion of current year capital budget could have to be financed by debt.

e)

Expert Solution

Explanation of Solution

Retained earnings available is $9,000,000

Calculation of Capital budget financed with Retained earnings:

Percentage of capital budget=Retained earings availablecapital budget=$9,000,000$15,000,000=60%

Therefore, percentage of capital budget financed by retained earnings is 60%

Calculation of Capital budget financed with debt:

Percentage of capital budget=Debt availablecapital budget=$6,000,000$15,000,000=40%

Therefore, percentage of capital budget financed by debt is 40%

f)

Summary Introduction

To determine: External (new) equity needed.

f)

Expert Solution

Explanation of Solution

Equity needed=$15,000,000×0.70=$10,500,000

Calculation of retained earnings:

Retained earnings available=$11,000,000−$2(1,000,000)=$11,000,000−$2,000,000=$9,000,000

Therefore, retained earnings available is amounted to $9,000,000

Calculation of external equity needed:

External equity needed=$10,500,000−$9,000,000=$1,500,000

Therefore, external (new) equity needed is $1,500,000

g)

Summary Introduction

To determine: Company’s capital budget for next year.

g)

Expert Solution

Explanation of Solution

Calculation of retained earnings:

Retained earnings available=$11,000,000−$2(1,000,000)=$11,000,000−$2,000,000=$9,000,000

Therefore, retained earnings available is amounted to $9,000,000

Retained earnings availability is equals the required equity to find new capital budget.

Calculation of capital budget using required equity:

Required equity=Capital budget(Target equity ratio)$9,000,000=Capital budget(0.7)Capital budget=$12,857,143

Hence, capital budget is $12,857,143

Therefore, if Company R cuts its capital budget from $15 million to $12.86 million, it will maintain its DPS $2.00, its current capital structure and still follow its residual dividend policy.

h)

Summary Introduction

To determine: Actions taken by company when its forecasted retained earnings are less than retained earnings required.

h)

Expert Solution

Explanation of Solution

Company can take any one of the following four actions,

New issue of common stock,
Cuts its capital budget,
Company cuts the dividends,
Change the capital structure by using more debt funds.

Company should realize that every of these actions is not while not consequences to its cost of capital, stock price or both.

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Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 5

Chapter 14, Problem 11P

a)

Summary Introduction

To determine: Amount of retained earnings needed by company K to fund its capital budget.

a)

Expert Solution

Explanation of Solution

Given information:

Capital budget is $15,000,000

Net income is $11 million,

DPS dividend per share is $2,

Outstanding shares 1 million,

Capital structure is 30% debt and 70% equity.

Calculation of retained earnings:

Retained earnings=$15,000,000×0.70=$10,500,000

Therefore, retained earnings needed is amounted to $10,500,000

b)

Summary Introduction

To determine: Dividend per share (DPS) and pay-out ratio.

b)

Expert Solution

Explanation of Solution

Based on the residual dividend model, the amount $500,000 ($11,000,000-$10,500,000) is available for dividends.

Calculation of dividend per share:

DPS=Dividends availableOutstanding shares=$500,0001,000,000=$0.50

Therefore, dividend per share is $0.50

Calculation of pay-out ratio:

Pay-out ratio=Dividends availableNet income=$500,000$11,000,000=4.55%

Therefore, pay-out ratio is 4.55%

c)

Summary Introduction

To determine: Amount of retained earnings needed by company K to fund its capital budget, if it maintains $2 DPS for next year.

c)

Expert Solution

Explanation of Solution

Calculation of retained earnings:

Retained earnings available=$11,000,000−$2(1,000,000)=$11,000,000−$2,000,000=$9,000,000

Therefore, retained earnings available is amounted to $9,000,000

d)

Summary Introduction

To determine: Whether company maintains its current capital structure with its DPS and maintain $15 million capital budget without raising new common stock.

d)

Expert Solution

Explanation of Solution

Person X views that, company does not maintain because, if it maintains $2 DPS, only $9 million of retained earnings is available for capital projects. However, if the firm is to keep up its current capital structure of $10.5 million of equity is needed. This may necessitate the company to issue $1.5 million of common stock.

e)

Summary Introduction

To determine: Portion of current year capital budget could have to be financed by debt.

e)

Expert Solution

Explanation of Solution

Retained earnings available is $9,000,000

Calculation of Capital budget financed with Retained earnings:

Percentage of capital budget=Retained earings availablecapital budget=$9,000,000$15,000,000=60%

Therefore, percentage of capital budget financed by retained earnings is 60%

Calculation of Capital budget financed with debt:

Percentage of capital budget=Debt availablecapital budget=$6,000,000$15,000,000=40%

Therefore, percentage of capital budget financed by debt is 40%

f)

Summary Introduction

To determine: External (new) equity needed.

f)

Expert Solution

Explanation of Solution

Equity needed=$15,000,000×0.70=$10,500,000

Calculation of retained earnings:

Retained earnings available=$11,000,000−$2(1,000,000)=$11,000,000−$2,000,000=$9,000,000

Therefore, retained earnings available is amounted to $9,000,000

Calculation of external equity needed:

External equity needed=$10,500,000−$9,000,000=$1,500,000

Therefore, external (new) equity needed is $1,500,000

g)

Summary Introduction

To determine: Company’s capital budget for next year.

g)

Expert Solution

Explanation of Solution

Calculation of retained earnings:

Retained earnings available=$11,000,000−$2(1,000,000)=$11,000,000−$2,000,000=$9,000,000

Therefore, retained earnings available is amounted to $9,000,000

Retained earnings availability is equals the required equity to find new capital budget.

Calculation of capital budget using required equity:

Required equity=Capital budget(Target equity ratio)$9,000,000=Capital budget(0.7)Capital budget=$12,857,143

Hence, capital budget is $12,857,143

Therefore, if Company R cuts its capital budget from $15 million to $12.86 million, it will maintain its DPS $2.00, its current capital structure and still follow its residual dividend policy.

h)

Summary Introduction

To determine: Actions taken by company when its forecasted retained earnings are less than retained earnings required.

h)

Expert Solution

Explanation of Solution

Company can take any one of the following four actions,

New issue of common stock,
Cuts its capital budget,
Company cuts the dividends,
Change the capital structure by using more debt funds.

Company should realize that every of these actions is not while not consequences to its cost of capital, stock price or both.

Answer 6

Chapter 14, Problem 11P

a)

Summary Introduction

To determine: Amount of retained earnings needed by company K to fund its capital budget.

a)

Expert Solution

Explanation of Solution

Given information:

Capital budget is $15,000,000

Net income is $11 million,

DPS dividend per share is $2,

Outstanding shares 1 million,

Capital structure is 30% debt and 70% equity.

Calculation of retained earnings:

Retained earnings=$15,000,000×0.70=$10,500,000

Therefore, retained earnings needed is amounted to $10,500,000

Answer 7

Chapter 14, Problem 11P

a)

Summary Introduction

To determine: Amount of retained earnings needed by company K to fund its capital budget.

Answer 8

a)

Expert Solution

Explanation of Solution

Given information:

Capital budget is $15,000,000

Net income is $11 million,

DPS dividend per share is $2,

Outstanding shares 1 million,

Capital structure is 30% debt and 70% equity.

Calculation of retained earnings:

Retained earnings=$15,000,000×0.70=$10,500,000

Therefore, retained earnings needed is amounted to $10,500,000

Answer 9

a)

Expert Solution

Answer 10

a)

Expert Solution

Answer 11

Expert Solution

Answer 12

b)

Summary Introduction

To determine: Dividend per share (DPS) and pay-out ratio.

b)

Expert Solution

Explanation of Solution

Based on the residual dividend model, the amount $500,000 ($11,000,000-$10,500,000) is available for dividends.

Calculation of dividend per share:

DPS=Dividends availableOutstanding shares=$500,0001,000,000=$0.50

Therefore, dividend per share is $0.50

Calculation of pay-out ratio:

Pay-out ratio=Dividends availableNet income=$500,000$11,000,000=4.55%

Therefore, pay-out ratio is 4.55%

Answer 13

b)

Summary Introduction

To determine: Dividend per share (DPS) and pay-out ratio.

Answer 14

b)

Expert Solution

Explanation of Solution

Based on the residual dividend model, the amount $500,000 ($11,000,000-$10,500,000) is available for dividends.

Calculation of dividend per share:

DPS=Dividends availableOutstanding shares=$500,0001,000,000=$0.50

Therefore, dividend per share is $0.50

Calculation of pay-out ratio:

Pay-out ratio=Dividends availableNet income=$500,000$11,000,000=4.55%

Therefore, pay-out ratio is 4.55%

Answer 15

b)

Expert Solution

Answer 16

b)

Expert Solution

Answer 17

Expert Solution

Answer 18

c)

Summary Introduction

To determine: Amount of retained earnings needed by company K to fund its capital budget, if it maintains $2 DPS for next year.

c)

Expert Solution

Explanation of Solution

Calculation of retained earnings:

Retained earnings available=$11,000,000−$2(1,000,000)=$11,000,000−$2,000,000=$9,000,000

Therefore, retained earnings available is amounted to $9,000,000

Answer 19

c)

Summary Introduction

To determine: Amount of retained earnings needed by company K to fund its capital budget, if it maintains $2 DPS for next year.

Answer 20

c)

Expert Solution

Explanation of Solution

Calculation of retained earnings:

Retained earnings available=$11,000,000−$2(1,000,000)=$11,000,000−$2,000,000=$9,000,000

Therefore, retained earnings available is amounted to $9,000,000

Answer 21

c)

Expert Solution

Answer 22

c)

Expert Solution

Answer 23

Expert Solution

Answer 24

d)

Summary Introduction

To determine: Whether company maintains its current capital structure with its DPS and maintain $15 million capital budget without raising new common stock.

d)

Expert Solution

Explanation of Solution

Person X views that, company does not maintain because, if it maintains $2 DPS, only $9 million of retained earnings is available for capital projects. However, if the firm is to keep up its current capital structure of $10.5 million of equity is needed. This may necessitate the company to issue $1.5 million of common stock.

Answer 25

d)

Summary Introduction

To determine: Whether company maintains its current capital structure with its DPS and maintain $15 million capital budget without raising new common stock.

Answer 26

d)

Expert Solution

Explanation of Solution

Person X views that, company does not maintain because, if it maintains $2 DPS, only $9 million of retained earnings is available for capital projects. However, if the firm is to keep up its current capital structure of $10.5 million of equity is needed. This may necessitate the company to issue $1.5 million of common stock.

Answer 27

d)

Expert Solution

Answer 28

d)

Expert Solution

Answer 29

Expert Solution

Answer 30

e)

Summary Introduction

To determine: Portion of current year capital budget could have to be financed by debt.

e)

Expert Solution

Explanation of Solution

Retained earnings available is $9,000,000

Calculation of Capital budget financed with Retained earnings:

Percentage of capital budget=Retained earings availablecapital budget=$9,000,000$15,000,000=60%

Therefore, percentage of capital budget financed by retained earnings is 60%

Calculation of Capital budget financed with debt:

Percentage of capital budget=Debt availablecapital budget=$6,000,000$15,000,000=40%

Therefore, percentage of capital budget financed by debt is 40%

Answer 31

e)

Summary Introduction

To determine: Portion of current year capital budget could have to be financed by debt.

Answer 32

e)

Expert Solution

Explanation of Solution

Retained earnings available is $9,000,000

Calculation of Capital budget financed with Retained earnings:

Percentage of capital budget=Retained earings availablecapital budget=$9,000,000$15,000,000=60%

Therefore, percentage of capital budget financed by retained earnings is 60%

Calculation of Capital budget financed with debt:

Percentage of capital budget=Debt availablecapital budget=$6,000,000$15,000,000=40%

Therefore, percentage of capital budget financed by debt is 40%

Answer 33

e)

Expert Solution

Answer 34

e)

Expert Solution

Answer 35

Expert Solution

Answer 36

f)

Summary Introduction

To determine: External (new) equity needed.

f)

Expert Solution

Explanation of Solution

Equity needed=$15,000,000×0.70=$10,500,000

Calculation of retained earnings:

Retained earnings available=$11,000,000−$2(1,000,000)=$11,000,000−$2,000,000=$9,000,000

Therefore, retained earnings available is amounted to $9,000,000

Calculation of external equity needed:

External equity needed=$10,500,000−$9,000,000=$1,500,000

Therefore, external (new) equity needed is $1,500,000

Answer 37

f)

Summary Introduction

To determine: External (new) equity needed.

Answer 38

f)

Expert Solution

Explanation of Solution

Equity needed=$15,000,000×0.70=$10,500,000

Calculation of retained earnings:

Retained earnings available=$11,000,000−$2(1,000,000)=$11,000,000−$2,000,000=$9,000,000

Therefore, retained earnings available is amounted to $9,000,000

Calculation of external equity needed:

External equity needed=$10,500,000−$9,000,000=$1,500,000

Therefore, external (new) equity needed is $1,500,000

Answer 39

f)

Expert Solution

Answer 40

f)

Expert Solution

Answer 41

Expert Solution

Answer 42

g)

Summary Introduction

To determine: Company’s capital budget for next year.

g)

Expert Solution

Explanation of Solution

Calculation of retained earnings:

Retained earnings available=$11,000,000−$2(1,000,000)=$11,000,000−$2,000,000=$9,000,000

Therefore, retained earnings available is amounted to $9,000,000

Retained earnings availability is equals the required equity to find new capital budget.

Calculation of capital budget using required equity:

Required equity=Capital budget(Target equity ratio)$9,000,000=Capital budget(0.7)Capital budget=$12,857,143

Hence, capital budget is $12,857,143

Therefore, if Company R cuts its capital budget from $15 million to $12.86 million, it will maintain its DPS $2.00, its current capital structure and still follow its residual dividend policy.

Answer 43

g)

Summary Introduction

To determine: Company’s capital budget for next year.

Answer 44

g)

Expert Solution

Explanation of Solution

Calculation of retained earnings:

Retained earnings available=$11,000,000−$2(1,000,000)=$11,000,000−$2,000,000=$9,000,000

Therefore, retained earnings available is amounted to $9,000,000

Retained earnings availability is equals the required equity to find new capital budget.

Calculation of capital budget using required equity:

Required equity=Capital budget(Target equity ratio)$9,000,000=Capital budget(0.7)Capital budget=$12,857,143

Hence, capital budget is $12,857,143

Therefore, if Company R cuts its capital budget from $15 million to $12.86 million, it will maintain its DPS $2.00, its current capital structure and still follow its residual dividend policy.

Answer 45

g)

Expert Solution

Answer 46

g)

Expert Solution

Answer 47

Expert Solution

Answer 48

h)

Summary Introduction

To determine: Actions taken by company when its forecasted retained earnings are less than retained earnings required.

h)

Expert Solution

Explanation of Solution

Company can take any one of the following four actions,

New issue of common stock,
Cuts its capital budget,
Company cuts the dividends,
Change the capital structure by using more debt funds.

Company should realize that every of these actions is not while not consequences to its cost of capital, stock price or both.

Answer 49

h)

Summary Introduction

To determine: Actions taken by company when its forecasted retained earnings are less than retained earnings required.

Answer 50

h)

Expert Solution

Explanation of Solution

Company can take any one of the following four actions,

New issue of common stock,
Cuts its capital budget,
Company cuts the dividends,
Change the capital structure by using more debt funds.

Company should realize that every of these actions is not while not consequences to its cost of capital, stock price or both.

Answer 51

h)

Expert Solution

Answer 52

h)

Expert Solution

Answer 53

Expert Solution

Answer 54

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Amount of retained earnings needed by company K to fund its capital budget.

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To determine: Amount of retained earnings needed by company K to fund its capital budget.

Explanation of Solution

To determine: Dividend per share (DPS) and pay-out ratio.

Explanation of Solution

To determine: Amount of retained earnings needed by company K to fund its capital budget, if it maintains $2 DPS for next year.

Explanation of Solution

To determine: Whether company maintains its current capital structure with its DPS and maintain $15 million capital budget without raising new common stock.

Explanation of Solution

To determine: Portion of current year capital budget could have to be financed by debt.

Explanation of Solution

To determine: External (new) equity needed.

Explanation of Solution

To determine: Company’s capital budget for next year.

Explanation of Solution

To determine: Actions taken by company when its forecasted retained earnings are less than retained earnings required.

Explanation of Solution

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