With its current financial policies, Flagstaff Inc.will have to issue new common stock to fund its capital budget.Since new stock has a higher cost than reinvested 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 its target capital structure, Flagstaff would be able to raise more funds through debt financing instead of having to issue new common stock. This would help reduce the need for new stock issuances, which have a higher cost compared to reinvested earnings. Increasing the proposed capital budget, reducing short-term bank debt, reducing the percentage of debt in the target capital structure, or increasing the dividend payout ratio would not directly address the issue of avoiding new stock issuances.

With Its Current Financial Policies, Flagstaff Inc