This is the percentage of total capital that the company wants to maintain in common equity. It is not the percentage of the total project funding that should come from a new issue of common stock.
This answer results from multiplying 70% by the total project funding of $75,000,000 and using the result, $52,500,000, as the answer in percentage form. To answer this question, it is necessary to calculate the amount of funding to come from the new issue of common stock and then divide that amount by the $75,000,000 to calculate the percentage of the $75 million that will come from the new issue of common stock.
Of the $75 million needed, the company already has $15 million. Therefore, they need to raise $60 million more. Of this, 70%, or $42 million will come from a new issuance of common equity. This is 56% ($42 million ÷ $75 million) of the total amount that is needed.
This answer results from multiplying 70% by the total project funding of $75,000,000, then subtracting from the resulting $52,500,000 the $15,000,000 in cash available. The result, $37,500,000, divided by the total need of $75,000,000 equals 50%. However, a new issue of common stock in the amount of $37,500,000 would change the capital structure, reducing the percentage of common equity to total capital. In order to maintain the same capital structure after the financing, the amount allocated to a new issue of common stock should be 70% of the external financing needed. The reason is because the $15,000,000 cash to be used is in retained earnings in the capital structure, and retained earnings will not change as a result of the financing.
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