Wolverine corporation plans to pay a $3 dividend per share on each of
Wolverine Corporation would need to raise $2 million in external equity in order to maintain its current debt to total assets ratio of 0.40 and finance their capital budget for the year. This can be calculated by using the following formula:
Required Equity = (Total Assets x Debt Ratio) – Total Liabilities – Capital Budget
Therefore, using Wolverine’s given information we can calculate:
Required Equity = (300,000 x 0.40) – 0 – 4,000,000
Required Equity = 2,000,000
Therefore based on these assumptions Wolverine Corporation would need to raise $2 million in external equity in order to cover their capital budget and maintain their desired debt ratio.