If the company has a capital budget 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?

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.