FIN 534 RANK Imagine Your Future /fin534rank.com FIN 534 RANK Imagine Your Future /fin534rank.com | Page 149

5. DeAngelo Corp.'s projected net 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
without issuing new stock, but its board of directors had decreed 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. Versus the current policy, how much larger could the capital
budget be if (1) the target debt ratio were raised to 75%, other things
held constant, (2) the target payout ratio were lowered to 20%, other
things held constant, and (3) 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
===============================================