Issuing new equity and increase in debt financing required

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Red Rock Lobster has 20 million shares of common stock outstanding and maintains a D/E ratio of .6. The company expects earnings to be $60 million this year.

a) Calculate the maximum investment funds available without issuing new equity and the increase in debt financing required.

b) If the firm uses a residual dividend policy and capital expenditures of $70 million are planned for the coming year, what will the dividend per share be?

c) In part (b) how much borrowing will take place?

d) If no capital expenditures are planned for the coming year, what will the dividend per share be under a residual dividend policy? How much will the company need to borrow?

Reference no: EM132000829

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