EXAMPLE

Beference$]$

If Allied's addition to retained earnings in $2020$ is expected to be $$66$ milion; and its target

capital structure consists of $33\%$ debt, $2\%$ preferred, and $65\%$ equity. What is its retained

earnings breakpoint? $($For Reference Only$)$

This calculation indicates that at a capital budget of $$101\mathrm{.}5$ million Allied would not have to

raise new equity. At any capital budget larger than this amount, Allied would exhaust its

retained earnings and would have to issue new common stock.