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Answer to Question #6213 in Economics of Enterprise for LaMarcus Streeter

Question #6213
1. Bankston Corporation forecasts that if all of its existing financial policies are followed, its proposed capital budget would be so large that it would have to issue new common stock. Since new stock has a higher cost than retained earnings, Bankston would like to avoid issuing new stock. Which of the following actions would REDUCE its need to issue new common stock?

a. Increase the dividend payout ratio for the upcoming year.
b. Increase the percentage of debt in the target capital structure.
c. Increase the proposed capital budget.
d. Reduce the amount of short-term bank debt in order to increase the current ratio.
e. Reduce the percentage of debt in the target capital structure.
Expert's answer
e. Reduce the percentage of debt in the target capital
structure.

This will help to increase retained earnings, so new stocks will have lower cost than retain earnings.

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