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Bankston Corporation forecasts that if all of its existing financial policies are followed, its proposed capital...

Bankston Corporation forecasts that if all of its existing financial policies are followed, its proposed capital budget would be so large that it would have to issue new common stock. Since new stock has a higher cost than retained earnings, Bankston would like to avoid issuing new stock. Which of the following actions would INCREASE its need to issue new common stock?

a.

Increase the percentage of debt in the target capital structure
b.

Decrease the dividend payout ratio for the upcoming year
c.

Reduce the percentage of debt in the target capital structure
d.

Decrease the proposed capital budget

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Answer #1

c. Reduce the percentage of debt in the target capital structure.

Reducing the percentage of debt in target capital structure will increse the need for own funds, which will inturn increase the need for own funds, so which will increase the need for issue of common stock.

The following actions will not increase the need to issue new common stock;

Incresing the percentage of debt in the target capital structure.

Decrease the dividend payout ratio for the upcoming year.

Decreasing the proposed capital budget.

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