The Following Facts Apply to Your Company: Target Capital Structure

question 20

Multiple Choice

The following facts apply to your company: Target capital structure: 50% debt; 50% equity.EBIT: $200 million.
Assets: $500 million.Tax rate: 40%.
Cost of new and old debt: 8%.
Based on the residual dividend policy, the payout ratio is 60 percent.How large (in millions of dollars) will the capital budget be?

• A)$43.2
• B)$50.0
• C)$64.8
• D)$86.4
• E)$108.0

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Definitions:

Product-variety Externality

The impact on consumers and producers resulting from an increase or decrease in the variety of products available in the market.

Consumer Surplus

The difference between what consumers are willing to pay for a good or service and what they actually pay.

Producer Surplus

The amount a seller is paid for a good minus the seller’s cost of providing it.

Economic Profits

The difference between total revenue and total costs, including both explicit and implicit costs, indicating the financial gain exceeding all costs.