Globex corporation is expected to generate $1,800,000 in net income over the next year. globex corporation’s stockholders expect it to maintain its long-run dividend payout ratio of 40.00% of earnings. if globex wants to maintain its current capital structure of 60% debt and 40% equity, the maximum capital budget it can support with this year’s expected net income is .

The answer is: Maximum capital budget the firm can support, with this year’s expected net income, is $2,700,000.

Explanation:

Please find the below for detailed explanation and calculation:

- The Increase in Retained Earnings after the firm pays out dividend is : Net income in the year x ( 1- Dividend payout ratio) = 1,800,000 ( 1 -40%) = $1,080,000;

- As 40% of the capital expenditure next year will be firm by Equity, the maximum capital budget this year expected income can support is:

Increase in Retained Earnings after the firm pays out dividend / 40% = 1,080,000/40% = $2,700,000.

=> Thus, the answer is $2,700,000.

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