1. Rack city , a retail firm, is making a decision on how much it should payout to its shareholders. It has $100 million in investable funds. The firm has 100 million shares outstanding, selling for $15 per share. The beta of the stock is 1.25 and the risk-free rate is 8%. The expected return on the market is 16%. Currently the firm has $500 million of debt outstanding, with a marginal yield of 12%. The corporate tax rate is 50%. Assume the firm will finance any investments at its current debt ratio and has the following projects available:

   Project	Investment ($ millions)	After-tax return on capital (%)
   A	15	27
   B	10	20
   C	25	16
   D	20	14
   E	30	12

   1. Based on this information, what is the companys projected capital expenditure next year (i.e. which of the five projects would you accept and why)? (5 marks)
   2. Assuming the firm accepts your investment recommendation, what is the maximum amount that the company will have available to pay out as dividends next year? (5 marks)
   3. Would you pay out this maximum amount as dividends? Why or why not? (5 marks)