Question

Ink Inc. has a capital structure consisting of 25 percent debt and 75 percent common equity financing. The company has $800 million in net income and plans to pay out 40 percent of their earnings as dividends. What is the maximum amount of new financing that the company can raise without selling new common stock?

Answer 1

$640 million

Step-by-step explanation:

The computation of maximum amount of new financing is shown below:-

New financing from equity = $800 million × (1 - 40%)

= $480 million

New financing from debt = $480 million ÷ 75% × 25%

= $160 million

Now the maximum amount of new financing is

= $480 million + $160 million

= $640 million

Hence, the maximum amount of new financing is $640 million