Banerjee Inc.wants to maintain a target capital structure with 35% debt and 65% equity.Its forecasted net income is $150,000,and its board of directors has decreed that no new stock can be issued during the coming year.If the firm follows the residual dividend model,what is the maximum capital budget that is consistent with maintaining the target capital structure?
A) $286,154
B) $223,846
C) $230,769
D) $205,385
E) $186,923

Question

Quizplus · Accepted Answer

To maintain the target capital structure of 35% debt and 65% equity, the firm must finance its capital budget with 35% debt and 65% equity. Since no new stock can be issued, all equity financing must come from retained earnings (net income). The maximum capital budget that can be financed while maintaining this structure is found by dividing the net income by the equity portion of the capital structure: $150,000 / 0.65 = $230,769.