If a Firm Uses External Financing as a Plug Item

question 97

Multiple Choice

If a firm uses external financing as a plug item, has a new capital budget of $2 million, a net income of $3 million, and a plowback ratio of 40%, how much should be raised in external funds?

• A)$200,000
• B)$600,000
• C)$800,000
• D)$1,200,000 Plowback = $3 million x .40 = $1.2 million

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