Wolverine Corporation plans to pay a $3.00 dividend per shareon each of its 300,

Question

Wolverine Corporation plans to pay a $3.00 dividend per shareon each of its 300,000 shares next year. Wolverineanticipates earnings of $6.25 per share over the year. If thecompany has a capital budget requiring an investment of $4 millionover the year and it desires to maintain its present debt to totalassets (debt ratio) of 0.40, how much extermal equity must itraise? Assume that Wolverine's capital structure includes only commonequity and debt, and that debt and equity will be the only sourcesof funds to finance capital projects over the year. Wolverine Corporation plans to pay a $3.00 dividend per shareon each of its 300,000 shares next year. Wolverineanticipates earnings of $6.25 per share over the year. If thecompany has a capital budget requiring an investment of $4 millionover the year and it desires to maintain its present debt to totalassets (debt ratio) of 0.40, how much extermal equity must itraise? Assume that Wolverine's capital structure includes only commonequity and debt, and that debt and equity will be the only sourcesof funds to finance capital projects over the year.

Explanation / Answer

First, the firm desires to pay out $3 * 300,000 = $900,000 in dividends. In addition, it needs to make a $4,000,000 capital investment. Total is $4,900,000. It desires 0.4 * $4,900,000 = $1,960,000 of equity. Its total earnings is $6.25 * 300,000 = $1,875,000. The difference is what it needs to raise in equity, which is $85,000.

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