1.Prince Albert Milling (PAM) has debt and common shares in its capital structure and it maintains a strict debt to equity ratio of 1.75. The current market price per common share is $60. PAM expects this year's earnings to be $84 million. Erika, the financial manager, is considering three projects with expected investment outlays as follows:

Project

A

B

C

Initial outlays (Millions)

$50

$90

$148

1. Assume that the three projects are all equally desirable and Erika would like to finance as many of them as possible (she wants the largest capital budget). Which project or combination of projects can be financed without changing the capital structure? (5 marks) Hint: The budget should include both debt and equity.

1. PAM's management have decided that if two combinations exist, Erika will select the combination that employs the largest amount of capital. Which combination should Erika select? (2 mark)

1. Suppose PAM uses a residual dividend policy and it has 20 million shares outstanding. What will be the dividend per share if Erika follows your recommendation from Part (b)? (6 marks)