DeAngelo Corp.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%. DeAngelo has more positive NPV projects than it can finance without issuing new stock, but its board of directors had decreed that it cannot issue any new shares in the foreseeable future. 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% and (3) the debt ratio and payout were both changed by the indicated amounts. Increase in Capital Budget Increase Debt Lower Payout Do Both to 75% to 20%___________________

1.

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

There is no word limit. Please, write the explanation.

2.    Which of the following statements best describes the optimal capital structure?

a. The optimal capital structure is the mix of debt, equity, and preferred stock that maximizes the companys earnings per share (EPS).

b. The optimal capital structure is the mix of debt, equity, and preferred stock that maximizes the companys stock price.

c. The optimal capital structure is the mix of debt, equity, and preferred stock that minimizes the companys cost of equity.

d. The optimal capital structure is the mix of debt, equity, and preferred stock that minimizes the companys cost of debt.

e. The optimal capital structure is the mix of debt, equity, and preferred stock that minimizes the companys cost of preferred stock.

3.    Which of the following statements is CORRECT?

a. A firm can use retained earnings without paying a flotation cost. Therefore, while the cost of retained earnings is not zero, its cost is generally lower than the after-tax cost of debt.

b. The capital structure that minimizes a firms weighted average cost of capital is also the capital structure that maximizes its stock price.

c. The capital structure that minimizes the firms weighted average cost of capital is also the capital structure that maximizes its earnings per share.

d. If a firm finds that the cost of debt is less than the cost of equity, increasing its debt ratio must reduce its WACC.

e. Other things held constant, if corporate tax rates declined, then the Modigliani-Miller tax-adjusted tradeoff theory would suggest that firms should increase their use of debt.