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Q1) Allensworth Motors predicts that its earnings per share will be $3.00 this year. Company has 500 million shares of stock outstanding. Allensworth evaluates that its capital budget for upcoming year will be $800 million, and it is committed to funding complete capital budget. Company is also committed to sustaining its dividend of $2.00 per share, and it wishes to avoid issuing new common stock. Company's capital structure consists of debt and common stock.  Given above constraints, what portion of $800 million capital budget will be funded with debt?

a. 53.13%
b. 46.02%
c. 40.00%
d. 6.25%
e. 37.50%

Q2) Redwood Systems follows strict residual dividend policy. Company evaluates that its capital expenditures this year will be $40 million, its net income will be $30 million, and its target capital structure is 60 percent equity and 40 percent debt.  Compute the company's dividend payout ratio?

a. 80%
b. 60%
c. 40%
d. 20%
e. 15%

Accounting Basics, Accounting

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  • Reference No.:- M917930

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