A firm finances with both bonds and common equity, but does not wish to issue any new common stock during the coming year due to sub-optimal market conditions. It has committed to maintaining the dividend at the projected level. Given these constraints and the following information, what percentage of the capital budget must be financed with debt?

Projected capital budget $900,000

Common shares outstanding 500,000

Nominal cost of debt 10.00%

State + federal tax rate 25%

Projected dividend per share $2.00

Projected EPS $3.70

Answer rating: 100% (QA)

The percentage of the capital budget that must be financed with debt can be calculated by first dete... View the full answer