A firm has $50 million in assets and its optimal capital structure is 60% equity. If the firm has $12 million in retained earnings available to invest, at what asset level will the firm need to issue additional stock? (Assume no growth in retained earnings.)
A) The firm should have already issued additional stock.
B) The firm can increase assets by $30 million.
C) The firm can increase assets by $20 million.
D) There is insufficient information to determine an answer.

Question

Quizplus · Accepted Answer

The firm can finance 60% of its assets with equity. With $12 million in retained earnings, the firm can support $20 million in assets ($12 million / 0.60). Beyond this, additional stock would be needed.

A Firm Has $50 Million in Assets and Its Optimal