Explore BrainMass
Share

Explore BrainMass

    Capital budget

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    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 larger 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 to 75% Lower Payout to 20%
    Do Both
    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

    © BrainMass Inc. brainmass.com October 9, 2019, 11:39 pm ad1c9bdddf
    https://brainmass.com/business/budgets/capital-budget-263286

    Solution Preview

    The net income is $150 million and payout is 65%. Equity retained is 150X(1-0.65)=52.5 million. The target capital structure is 25% debt and 75% equity, so the retained income would fund 75% of the capital budget. Total ...

    Solution Summary

    The solution explains how to measure the impact on the capital budget of changes in debt ratio and payout ratio

    $2.19