Norton Electrical Has Quite a Few Positive NPV Projects from Which

question 49

Multiple Choice

Norton Electrical has quite a few positive NPV projects from which to choose.The problem is that it has more of these projects than it can finance without issuing new stock and the board of directors refuses to issue any new shares in the foreseeable future.Norton's projected net income is $150.0 million, its target capital structure is 25% debt and 75% equity, and its target payout ratio is 65%.The CFO now wants to determine how the maximum capital budget would be affected by changes in capital structure policy and/or the target dividend payout policy.Versus the current policy, how much larger could the capital budget be if (1) the target debt ratio were raised to 75%, other things held constant, (2) the target payout ratio were lowered to 20%, other things held constant, and (3) the debt ratio and payout were both changed by the indicated amounts.
Increase in Capital Budget
Increase Lower
Debt to 75% Payout to 20% Do both

• A) $114.0 $73.3 $333.9
• B) $120.0 $77.2 $351.5
• C) $126.4 $81.2 $370.0
• D) $133.0 $85.5 $389.5
• E) $140.0 $90.0 $410.0

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Definitions:

Capital Budgeting Approaches

Strategies and methodologies used by businesses to evaluate and select major investment and expenditure opportunities.

Conceptual Standpoint

A perspective or approach based on abstract ideas or theories rather than on practical applications.

Discounted Cash Flow

A valuation method used to estimate the attractiveness of an investment opportunity, using future cash flows adjusted to their present value.

Risk Adjustment

Risk adjustment is the process of correcting estimates, prices, or values to account for uncertainties or known risks.