QUESTION $2$:

Sandhurst Enterprises has a target debt$/$equity ratio of $\frac{1}{3}.$ It has internally generated after tax

cash flows of $$118,000,000.$ Which can be paid out in whole or in part as dividend? It has a

corporate tax rate of $40\%$ and cost of capital of $12\%.$ It is considering the following projects.

Project $U$ a perpetual project requires investment of $$30,000,000.$ It will provide before tax cash

flow of $$6,000,000$ one year from today and $$6,300,000$ two years from today. After that cash

flow will decline at the rate of $6\%$ per year forever. Its required rate of return is $12\%.$

Project V a perpetual project requires investment of $$50,000,000.$ It will provide before tax cash

flow of $$10,000,000$ per year in perpetuity. Its required rate of return is $10\%.$

Project $W$ a $10$ year project requires investment of $$70,000,000.$ It will provide before tax cash

flow of $$15,000,000$ one year from today. After that cash flows will rise at the rate of $10\%$ per

year for $9$ years. Its required rate of return is $14\%.$

Project X a $25$ year project requires $$60,000,000$ investment. It will provide after tax cash flows

of $$5,000,000$ per year for $10$ years and after that $$10,000,000$ per year for an additional $15$

years. Its required rate of return is $8\%.$

Using the residual dividend policy approach determine which of these four projects Sandhurst

should invest in and what should be the dividend payout.