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Carnfield Enterpriseshad just completed its annual planning and budgeting process and needs to raise ​$20 million...

Carnfield Enterpriseshad just completed its annual planning and budgeting process and needs to raise ​$20 million to finance its capital expenditures for the coming year. The firm earned $18 million last year and will pay out half this amount in dividends. If the​ firm's CFO wants to finance new investments using no more than 30 percent debt financing, how much common stock will the firm have to issue to raise the needed $20 million?

How much common stock will the firm have to issue?

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Answer #1

We know that Carnfield Enterprises needs to raise $20 million to finance its capital expenditures for the coming year.

Company can use retained earnings, debt financing and common stock as its source of new financing

The firm’s earnings last year = $18 million

Dividend payout ratio = 50%

Therefore, retained earnings = the firm’s earnings last year * Dividend payout ratio

= $18 million * 50% = $9 million

New investment’s debt financing = 30% of total fund need to be raised

= 30% * $20 million = $6 million

Common stock the firm has to issue = total fund need to be raised - retained earnings - New investment’s debt financing

= $20 million - $9 million - $6 million

= $5 million

Therefore the common stocks, the firm has to issue is $5 million

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