Sheehan Corp.is forecasting an EPS of $3.00 for the coming year on its 500,000 outstanding shares of stock.Its capital budget is forecasted at $800,000,and it is committed to maintaining a $2.00 dividend per share.It finances with debt and common equity,but it wants to avoid issuing any new common stock during the coming year.Given these constraints,what percentage of the capital budget must be financed with debt?
A)30.54%
B)32.15%
C)33.84%
D)35.63%
E)37.50%

Question

Quizplus · Accepted Answer

Sheehan Corp. plans to pay a $2.00 dividend per share on 500,000 shares, totaling $1,000,000 in dividends. With an EPS of $3.00, the total earnings are $1,500,000. Retained earnings available for the capital budget are $1,500,000 - $1,000,000 = $500,000. The capital budget is $800,000, so $300,000 must be financed with debt. The percentage of the capital budget financed with debt is $300,000 / $800,000 = 37.50%.