InTech, a computer software firm that has never paid dividends before, is considering whether it should start
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InTech, a computer software firm that has never paid dividends before, is considering whether it should start doing so. This firm has a cost of equity of 22% and a cost of debt of 10% (the tax rate is 40%). The firm has $100 million in debt outstanding and 50 million shares outstanding, selling for $10 per share. The firm currently has net income of $90 million and depreciation charges of $10 million. It also has the following projects available:
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The firm plans to finance all its investment needs at its current debt ratio.
a. Should the company return money to its stockholders?
b. If so, how much should be returned to stockholders?
The firm plans to finances its future capital investment needs using a 20% debt to capital ratio.
a. Which of these projects should the firm accept?
b. How much (if any) should the firm pay out as dividends?
The cost of debt is the effective interest rate a company pays on its debts. It’s the cost of debt, such as bonds and loans, among others. The cost of debt often refers to before-tax cost of debt, which is the company's cost of debt before taking... Cost Of Equity
The cost of equity is the return a company requires to decide if an investment meets capital return requirements. Firms often use it as a capital budgeting threshold for the required rate of return. A firm's cost of equity represents the...
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a Since all projects have NPV 0 none of them should be accepted b The firm has free cash f...View the full answer
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