CompUSA Corp.'s projected net income is $280 million, its current target capital structure is 25% debt and 75% equity, and its current target dividend payout ratio is 35%. CompUSA has more positive NPV projects than it can finance without issuing new stock, but its board of directors decided that it cannot issue any new shares in the foreseeable future. The CFO now wants to determine how the maximum capital budget would be affected by changes in capital structure policy and/or the target dividend payout policy. Compared to the current policy, how much increase could the total capital budget be if the target payout ratio is lowered to 20% and the target proportion of debt is raised to 35% debt and 65% equity at the same time, net income is held constant? (Please show work)

CompUSA Corp.'s projected net income is $280 million, its current target capital structure is 25% debt and 75% equity, and its current target dividend payout ratio is 35%. CompUSA has more positive NPV projects than it can finance without issuing new stock, but its board of directors decided that it cannot issue any new shares in the foreseeable future. The CFO now wants to determine how the maximum capital budget would be affected by changes in capital structure policy and/or the target dividend payout policy. Compared to the current policy, how much increase could the total capital budget be if the target payout ratio is lowered to 20% and the target proportion of debt is raised to 35% debt and 65% equity at the same time, net income is held constant? (Please show work)

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter21: Dynamic Capital Structures And Corporate Valuation

Section: Chapter Questions

Problem 5MC: David Lyons, CEO of Lyons Solar Technologies, is concerned about his firms level of debt financing....

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