Bankston Corporation forecasts that if all of its existing financial policies are followed, its proposed capital budget would be so large that it would have to issue new common stock. Since new stock has a higher cost than retained earnings, Bankston would like to avoid issuing new stock. Which of the following actions would REDUCE its need to issue new common stock?

Question

Quizplus · Accepted Answer

By increasing the percentage of debt in the target capital structure, Bankston can reduce its reliance on issuing new common stock since debt has a lower cost than equity. Increasing the dividend payout ratio would actually increase the amount of cash that needs to be raised, which would further increase Bankston's need to issue new common stock. Increasing the proposed capital budget would also increase its need to issue new common stock. Lastly, reducing short-term bank debt would not necessarily reduce the need to issue new common stock.

Bankston Corporation Forecasts That If All of Its Existing Financial