What is the purpose of finance?

D: $150,000

. Answer A is incorrect. The company has retained earnings to use as one source of project financing. B. Answer B is incorrect. This answer multiplies, rather than divides by, the weight equity represents in the financial structure (see D. for the correct calculation). This solution is calculated as: $60,000 x .40 = $24,000. C. Answer C is incorrect. This answer calculates the proportion of equity financing incorrectly as: Value of equity / value of debt = 1,000,000 / 1,500,000 = .667 so the investment level at which retained earnings would be exhausted is $60,000 / .667 = $90,000. See solution D. for the correct calculation. D. Answer D is correct. The proportion of equity in the financial structure of the firm is the value of outstanding equity divided by the total value of all financing sources. Value of equity = 1,000,000 = .40 Value of debt + Value of equity 1,000,000 + 1,500,000 Since the question states that the firm will maintain the same weight of each financing source, each dollar invested is composed of 40 cents of equity and 60 cents of debt. The first $60,000 of equity used in financing new projects is sourced from retained earnings. This source of equity is exhausted when the firm reaches an investment level of $60,000 / .4 = $150,000. When the level of investment exceeds this amount, equity financing must be raised externally.