Question

The Jersey Corporation has 70% of its capital structure in the form of equity capital. $150,000 in capital needs to be raised for a project but only $30,000 in funds is available through retained earnings. How much must be raised through common stock to maintain Jersey Corporation's capital structure?

Answer 1

The answer is $75,000.

Before, getting to the answer lets revise some basics.

We know there are two sources of capital - 1.) Owned funds 2.) Borrowed Funds

1.) Owned funds or Equity consists of Equity Share capital, Preferred Share Capital and Retained Earnings.

2.) Borrowed Capital consists of Loans, Bonds, Debentures etc.

Now coming to the solution.

We need $150,000 for our new project which should be funded such that 70% of the capital structure should be equity.

Therefore, 70% of $150,000 i.e., $105,000 should be through equity but we already have $30,000.

So, 105000 - 30000 = $75000 must be raised through the common stock to maintain the same capital structure.