The Patterson- Hale Trucking Company (PHT) needs to expand its fleet by 50 percent to meet the demands of two major contracts it just received to transport military equipment from manufacturing facilities scattered across the United States to various military bases. The cost of the expansion is estimated to be $ 14 million. PHT maintains a 30 percent debt ratio and pays out 50 percent of its earnings in common stock dividends each year.
a. If PHT earns $ 4 million in 2013, how much common stock will the firm need to sell in order to maintain its target capital structure?
b. If PHT wants to avoid selling any new stock but wants to maintain a constant dividend pay-out percentage of 50 percent, how much can the firm spend on new capital expenditures?