La Ronge Nature Adventures (LNA) maintains a strict debt to equity ratio of 0.60. The current market price per common share is $60. LNA expects this year's earnings to be $210 million. 

 

a.What will be the maximum budget that LNA can use for projects without changing the debt to equity ratio? (2 marks) Hint: The budget should include both debt and equity.

b.Julia, VP Finance, is considering 4 projects with expected investment outlays as follows:

Project

A

B

C

D

Initial outlays (Millions)

$50

$90

$100

200

A project can be taken fully or postponed (LNA cannot invest in partial projects). Assume that the 4 projects are all equally desirable and Julia would like to have the largest capital budget. Which project or combination of projects can be financed without changing the capital structure? (3 Marks)

c.Suppose LNA uses a residual dividend policy and it has 20 million shares outstanding. What will be the dividend per share if Julia follows your recommendation from Part (b)? (5 marks)

Answer rating: 100% (QA)

a To maintain the debt to equity ratio of 060 we need to find the maximum amount of debt and equity ... View the full answer