Tweek's Coffee has a capital structure consisting of 30 percent debt and 70 percent common equity financing. The company has $400 million in net income and plans to pay out 40 percent of their earnings as dividends. What is the maximum amount of new financing that the company can raise without selling new common stock?

Question

Twinkle

Business

15 June, 08:45

Tweek's Coffee has a capital structure consisting of 30 percent debt and 70 percent common equity financing. The company has $400 million in net income and plans to pay out 40 percent of their earnings as dividends. What is the maximum amount of new financing that the company can raise without selling new common stock?

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Answers (1)

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Carlo Pruitt · Answer 1

Tweek's Coffee maximum new financing will be $342.86

Explanation:

First we need to find Retained Earnings.

Retained Earnings = Net income x (1 - Dividend Payout)

Retained Earnings = $400 Million x (1 - 40%)

Retained Earnings = $240 Million

New financing can be generated

New financing = Retained earnings / Portion of equity

Maximum new financing = $240 / 70%

Maximum New financing = $342.86 Million