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Problem 5 ABC firm has a debt to equity ratio of 2.3 and new investments would cost $35 million this year. The firm expects earnings

Problem 5

ABC firm has a debt to equity ratio of 2.3 and new investments would cost $35 million this year. The firm expects earnings of $12 million this year.

a) Calculate the dividends paid and external financing required if the firm follows a residual dividend policy.

b) Calculate the dividends paid and external financing required if the firm has a fixed payout ratio of 25%

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