Peterson Company expects earnings per share and dividends per share to be $4.50 and $2.50 respectively next year.Peterson currently has 5,000,000 shares of common stock outstanding.The company's capital budget for next year is projected to be $25,000,000.Peterson plans to maintain its present debt ratio (debt to total assets) at 40% next year.(Assume that Peterson's capital structure includes only common equity and debt and that these will be the only sources of funds to finance capital budgeting projects next year.) Determine how much external equity the company must raise to finance its capital budget.

Question

Quizplus · Accepted Answer

R/E = ($4.50 - $2.50) × 5,000,000 shares = $10,000,000
Equity portion of capital budget = 0.60 × $25,000,000 = $15,000,000
External equity needed = $15,000,000 - $10,000,000 = $5,000,000

Peterson Company Expects Earnings Per Share and Dividends Per Share