Bankston Corporation forecasts that if all of its existing financial policies are adhered to, 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

Increasing the percentage of debt in the target capital structure would increase the proportion of financing that comes from debt, which generally has a lower cost than issuing new common stock. This would reduce the need for Bankston to issue new stock to fund its capital budget. Option B, increasing the dividend payout ratio, would have the opposite effect by decreasing the amount of retained earnings and therefore increasing the need for external financing. Option C, increasing the proposed capital budget, would further increase the need for external financing, including potentially issuing new common stock. Option D, reducing short-term bank debt to increase the current ratio, could help to improve the company's liquidity but would not directly impact its need to issue new stock to fund its capital budget.

Bankston Corporation Forecasts That If All of Its Existing Financial