The Blunt Trucking Company needs to expand its fleet by 50 percent to meet the demands of two major contracts it just received to transport military equipment from manufacturing facilities scattered across the United States to various military bases. The cost of the expansion is estimated to be $14 million. Blunt maintains a 40 percent debt ratio and pays out 50 percent of its earnings in common stock dividends each year.
a. If Blunt earns $6 million next year, how much common stock will the firm need to sell in order to maintain its target capital structure?
b. If Blunt wants to avoid selling any new stock but wants to maintain a constant dividend payout percentage of 50 percent, how much can the firm spend on new capital expenditures?