Norton Electrical has quite a few positive NPV projects from which to choose. The problem is that it has more of these projects than it can finance without issuing new stock and the board of directors refuses to issue any new shares in the foreseeable future. Norton's projected net income is $150.0 million, its target capital structure is 25% debt and 75% equity, and its target payout ratio is 65%. The CFO now wants to determine how the maximum capital budget would be affected by changes in capital structure policy and/or the target dividend payout policy.
a. How much dividends will the company payout under the target plans above?
b. Can they fund a $100.0 million capital project under the current plan without issuing new equity?
c. How much can they fund a capital project under their existing capital structure, projected net income and target dividend payout ratio?