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United Builders wants to maintain a target capital structure with 30% debt and 70% equity. Its forecasted net income is $550,000, and because of market conditions, the company will not issue any new stock during the coming year. If the firm follows the residual dividend policy, what is the maximum capital budget that is consistent with maintaining the target capital structure?

Respuesta :

Answer:

The maximum capital budget that is consistent with maintaining the target capital structure is $785,714

Explanation:

The computation of the maximum capital budget is shown below:

= Net income × (debt percentage ÷ equity percentage)

= $550,000 × (30% ÷ 70%)

= $235,714

The net income would be equal to equity i.e $550,000 as it reflect the maximum amount

So, the total and maximum amount of the capital structure would be

= $550,000 + $235,714

= $785,714