Question 4 (20 marks)

Jacky Enterprises Ltd will announce its earning result this year. The company earns $8 million dollars. The CEO is now considering the companys investment and dividend policy. The current capital structure is 40% of debt and 60% of equity. The CEO thinks that the company should maintain the current capital structure. The companys WACC is 15%. You are the financial advisor of Jacky Enterprises Ltd, please answer the following questions.

1. If the companys new investment project A requires $10 million dollars. The expected return of the project A is 18%, should we accept project A? Please explain.
2. Compute the amount of dividend to be paid, if any. Will the company need to issue new debt and/or equity? Please explain.

Assuming that the project A is rejected for some uncontrollable reasons and the CEO is now considering another project B. Project B requires $15 million dollars and its expected return is 16%. If project B is accepted, please compute the amount of dividend to be paid. Will the company need to issue new debt and/or equity to finance this project? Please explain.