Byron Corporation forecasts that its income will be $21,000 next year. The firm pays out 30 percent of earnings as dividends to common stockholders. Its target capital structure is 40 percent debt and 60 percent common equity. What Byron's retained earnings break point?

Question

Quizplus · Accepted Answer

The retained earnings break point represents the level of earnings at which the firm would need to issue new common stock to finance future investments. To calculate this break point, we need to first determine the amount of equity and debt financing in the target capital structure.

Equity financing = 60% x ($21,000 / 0.70) = $18,857.14
Debt financing = 40% x ($21,000 / 0.70) = $12,571.43

Next, we need to calculate the earnings available for financing after the dividend payout:

Earnings available for financing = $21,000 x (1 - 0.30) = $14,700

Finally, we can calculate the retained earnings break point:

Retained earnings break point = Equity financing - Earnings available for financing
= $18,857.14 - $14,700
= $4,157.14

Therefore, the answer is B, $24,500, which represents the level of retained earnings at which the firm would need to issue new equity to maintain its target capital structure.

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