Increase in capital budget


DeAngelo Corp.'s projected total income is $150.0 million, its target capital structure is 25% debt and 75% equity, and its target payout ratio is 65%. DeAngelo has more positive NPV projects than it can finance devoid of issuing new stock, however its board of directors had decreed that it can't issue any new shares in the foreseeable future. The CFO now wants to find out how the maximum capital budget would be influenced by changes in capital structure policy and/or the target dividend payout policy. Versus the current policy, how much larger could the capital budget be if:

a) The target debt ratio were increased to 75%, other things held constant,

b) The target payout ratio was lowered to 20%, other things held constant, and

c) The debt ratio and payout were both changed by the indicated amounts.

Increase in Capital Budget

Increase Debt Lower Payout Do Both to 75% to 20%___________________

a. $114.0 $73.3 $333.9
b. $120.0 $77.2 $351.5
c. $126.4 $81.2 $370.0
d. $133.0 $85.5 $389.5
e. $140.0 $90.0 $410.0

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Finance Basics: Increase in capital budget
Reference No:- TGS015791

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