Please guys i need the correct answer for this question as soon as possible. Tha

Question

Please guys i need the correct answer for this question as soon as possible. Thanks.

Santorum Co. has a capital structure of 50% debt. 20% preferred stock, and 30% common stock. Net income is forecast to be $1.000,000. The company pays out 40% of its earnings as dividends. How much new capital can the firm raise without having to issue new common shares or change its capital structure (That is, what is the breakpoint associated with retained earnings ) $180,000 $200,000 $600,000 $1,200,000 $2,000,000

Explanation / Answer

Correct answer: $2,000,000 The retained earnings break point indicates the size of the capital budget when not issuing additional common stock. BP(RE) = ($1,000,000(1 - 0.4))/0.30 = $2,000,000. BP = break point; RE = retained earnings

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