Question 3:

Comment on how leverage could affect shareholder wealth and the cost of capital?

Question 4.

Wolverine Corporation plans to pay $3 dividend per share on each of its 300,000 shares next year. Wolverine anticipates earnings of $6.25 per share over the years. If the company has a capital budgeting requiring an investment of 4 million over the year, and it desires to maintain its present debt to total assets (debt ratio) of 0.40, how much external equity must it raise? Assume that Wolverines capital structure includes only common equity and debt, and that debt and equity will be the only sources of funds to finance capital projects over the year.

Hint:

(Retained earnings + New equity) + (New debt) = 4000000

Retained earnings = Earnings Dividend = ??

Net debt / 4000000 = 0.4

Net debt = ??

Retained earnings + Net equity = 4000000 - New debt = ??

New equity = ??