CFAI P180, Q13, The answer is B while I chose C. Why it doesn’t multiply capital budget by equity percent in capital structure? In that case, dividend = 25 - (15*0.65) = 15.25 payout ratio = 15.25/25= 61% Am i right?
Last line of the paragraph: Wilson’s board has approved capital spending of $15 million to be entirely funded out of this year’s earnings. which basically means that “Wilson is not following its target capital structure of 35/65”
i don’t get that sentence, what does ‘entirely funded out of this year’s earnings’ mean? does that mean equity only structure?
it means that the $15m capital needs would be funded entirely from the net income of $25m (so you are basically left with 25-15=10 and dividend payout in this case would be 10/25= 0.40) “does that mean equity only structure?” well we don’t know that. however what we know is that the board has approved that Wilson does not need to raise debt in this instance to fulfill its capital needs.
and 35/65 is the target capital structure…its not the current capital structure…if it would have been then Wilson would be following ths same strategy you described. so we can assume because of no info about debt in the question that funding 15m entirely out of net iincome would help wilson acheive its target capital structure of 35/65 sorry if this confused you more…
now I get it, thanks u samakh!