its current financial policies, Flagstaff Incwill have to issue new common stock to fund its capital budget Since new stock has a higher cost than retained earnings, Flagstaff would like to avoid issuing new stock Which of the following actions would REDUCE its need to issue new common stock?
A) Increase the percentage of debt in the target capital structure.
B) Increase the proposed capital budget.
C) Reduce the amount of short-term bank debt in order to increase the current ratio.
D) Reduce the percentage of debt in the target capital structure.
E) Increase the dividend payout ratio for the upcoming year.

Question

Quizplus · Accepted Answer

By increasing the percentage of debt in the target capital structure, Flagstaff Inc can reduce its reliance on issuing new common stock to fund its capital budget. Debt is usually cheaper than equity, and increasing the proportion of debt in the capital structure will reduce the company's overall cost of capital. This, in turn, will reduce the need to issue new common stock to fund future projects. Therefore, option A is the best choice. The other options are not helpful in reducing the need to issue new common stock. Option B and E will increase the need for funds, while option C and D do not have a direct impact on the company's cost of capital.

Its Current Financial Policies, Flagstaff Incwill Have to Issue New