Sheehan Corp. is forecasting an EPS of $5.00 for the coming year on its 500,000 outstanding shares of stock. Its capital budget is forecasted at $700,000, and it is committed to maintaining a $4.00 dividend per share. It finances with debt and common equity, but it wants to avoid issuing any new common stock during the coming year. Given these constraints, what percentage of the capital budget must be financed with debt? 23.14% 35.43% 31.43% 29.43% 28.57%

28.57%

Explanation:

The computation of the percentage needed to financed with debt is shown below:

Percentage of the capital budget must be financed with debt is

= Debt needed ÷ Capital budget

where,

Capital budget is $700,000

And, the debt needed is

Debt needed = Capital budget - Retained earnings

where,

Retained earning is

For retained earning we need to do following calculations

Net income = EPS × Shares outstanding

= $5.00 × 500,000

= $2,500,000

Dividends paid is

= DPS × Shares outstanding

= $4.00 × 500,000

= $2,000,000

Now

Retained earnings available is

= $2,500,000 - $2,000,000

= $500,000

By placing these values the debt needed is

= $700,000 - $500,000

= $200,000

And the percentage is

= $200,000 ÷ $700,00

= 28.57%

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