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)32.15%
B)33.84%
C)35.63%
D)37.50%

Question

Quizplus · Accepted Answer

First, calculate the total dividends Sheehan Corp. will pay: $2.00 dividend per share * 500,000 shares = $1,000,000. Since the EPS is forecasted to be $3.00, the total earnings would be $3.00 * 500,000 shares = $1,500,000. The amount available for reinvestment (retained earnings) is the total earnings minus the total dividends, which is $1,500,000 - $1,000,000 = $500,000. Since the capital budget is $800,000 and the company has $500,000 from retained earnings, it needs $800,000 - $500,000 = $300,000 from debt. Therefore, the percentage of the capital budget that must be financed with debt is ($300,000 / $800,000) * 100% = 37.50%.