A company expects to earn $15 million in income this coming year. Its target cap

Question

A company expects to earn $15 million in income this coming year. Its target capital structure is 30% debt, 15% preferred stock, and 55% common equity financing. The company normally pays a dividend equal to 40% of its earnings. At what point will its WACC move from one level to the next, based upon the need to issue new common shares, assuming it adheres to its target capital structure? At what total capital investment level? PLEASE SHOW WORK a. $6 million b. $15 million c. $16.36 million d. $9 million

Explanation / Answer

The company will have to turn to outside financing when it exceeds its maximum sustainable growth rate "g"...= ROE * (1 - payout ratio)....at this point, new equity must be issued. or use internal growth rate: retained earnings/total assets c. $16.36 million

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