A. The Tennessee Bourbon Company (TBC) has two new projects, A & B. Project A needs an initial cash outlay of $20million and its internal rate of return is 18%. Project B needs an initial cash outlay of $10million and its internal rate of return is 10%. Project A is indivisible (i.e., it must be accepted in its entirety or else be rejected). Project B is also indivisible. TBCs WACC is 16%. The debt/assets ratio is now 45%, which is also the target ratio. This year TBCs net income is $22.5million. One year ago, TBCs dividend was $6million. How much dividend will be paid out this year if TBC follows a residual dividend policy?

1. $0million
2. $2.5million
3. $6million
4. $8.7million
5. $11.5million

B. Refer to the above question. If net income is $8million only, then TBC will:

a. pay out dividend of $6million, issue new bonds of $18million, and issue zero new shares

b. pay out dividend of $6million, issue new bonds of $9million, and issue new shares of $9million

c. pay out zero dividend, issue new bonds of $9million, and issue new shares of $3million

d. pay out zero dividend, issue new bonds of $12million, and issue zero new shares

e. pay out zero dividend, issue new bonds of $13.5million, and issue new shares of $8.5million

C. Refer to the above question. If net income is $8million only and TBC follows a compromise dividend policy, then TBC will:

a. pay out dividend of $6million, issue new bonds of $18million, and issue zero new shares

b. pay out dividend of $6million, issue new bonds of $9million, and issue new shares of $9million

c. pay out zero dividend, issue new bonds of $9million, and issue new shares of $3million

d. pay out zero dividend, issue new bonds of $12million, and issue zero new shares

e. pay out zero dividend, issue new bonds of $13.5million, and issue new shares of $8.5million