Problem:
Sheehan Corp. is forecasting an EPS of $4.00 for the coming year on its 500,000 outstanding shares of stock. Its capital budget is forecasted at $850,000, and it is committed to maintaining a $3.00 dividend per share. It finances with debt and common equity, but it wants to avoid issuing any new common stock during the coming year.
Required:
Given these constraints, what percentage of the capital budget must be financed with debt?
Note: Be sure to show how you arrived at your answer.