Del Grasso Fruit Company has more positive NPV projects than it can finance under its current policies without issuing new stock,but its board of directors had decreed that it cannot issue any new shares in the foreseeable future.Your boss,the CFO,wants to know how the capital budget would be affected by changes in capital structure policy and/or the target dividend payout policy.You obtained the following data,which shows the firm's projected net income (NI),its current capital structure and dividend payout policies,and three possible new policies.Projected net income for the coming year will not be affected by a policy change.How much larger could the capital budget be if (1)the target debt ratio were raised to the indicated amount,other things held constant, (2)the target payout ratio were lowered to the indicated amount,other things held constant,or (3)the debt ratio and dividend payout were both changed by the indicated amounts?
? ?

\text { Policy Changes }

\begin{array}{lllll}&\text { Current policy }&\text { Increase debt }&\text { Lower payout }&\text { Do both }\\\text { Projected NI } & \$ 237.5 & \$ 237.5 & \$ 237.5 & \$ 237.5 \\\% \text { Debt } & 25.0 \% & 75.0 \% & 25.0 \% & 75.0 \% \\\% \text { Equity } & 75.0 \% & 25.0 \% & 75.0 \% & 25.0 \% \\\% \text { Payout } & 65.0 \% & 65.0 \% & 20.0 \% & 20.0 \%\end{array}

?
A) 221.7;142.5;649.2
B) 277.1;129.7;525.8
C) 166.3;146.8;506.4
D) 219.5;172.4;616.7
E) 268.2;108.3;694.6

If a Firm Uses the Residual Dividend Model to Set

True/False

Correct Answer:VerifiedShow Answer

Correct Answer:
Verified