Question

A firm estimates that its proposed capital budget will force it to issue new common stock, which has a greater cost than the cost of retained earnings. The firm, however, would like to avoid issuing costly new common stock. Which of the following steps would mitigate the firmâs need to raise new common stock? a. Increasing the companyâs dividend payout ratio for the upcoming year.b. Reducing the companyâs debt ratio for the upcoming year.c. Increasing the companyâs proposed capital budget.d. All of the statements above are correct. e.None of the statements above is correct.

Answer 1

Answer:

Option D. All of the statements above are correct.

Explanation:

The reason is that the capital budget is the budget of investment in the business and in the current situation their is shortage of fund. So to meet the demand we can not pay dividends because it reduces the available cash available for investment. So the option A is incorrect.

Option B is also incorrect because the reducing debt ration means paying off the liabilities which again decrease the amount of cash available to invest in the company. So the option B is incorrect.

Increasing the proposed capital budget will require greater amount of funds. As we are already in shortage of funds, increasing capital budget is not the right course of action. So the option C is also incorrect.

Option E is also incorrect none of the option was correct, hence the correct option is D.