1. In theory, to fund an increased dividend payout or a stock buyback, a firm might invest less, borrow more, or issue more stock. Which of those three elements is Rockboros management willing to vary, and which elements remain fixed as a matter of the companys policy?

2. What happens to Rockboros financing need and unused debt capacity if:

a. no dividends are paid?

b. a 20% payout is pursued?

c. a 40% payout is pursued?

d. a residual payout policy is pursued?

Note that case Exhibit 8 presents an estimate of the amount of borrowing needed and assumes that the maximum debt capacity is, as a matter of policy, 40% of the book value of equity.