(Residual dividend theory) Briton Corporation is considering four investment opportunities. The required investment outlays and expected rates of return for these investments are shown below. The firms cost of capital is 14 percent. The investments are to be financed by 40 percent debt and 60 percent common equity. Internally generated funds totaling $750,000 are available for reinvestment.

1. Which investments should be accepted? According to the residual dividend theory, what amount should be paid out in dividends?
2. How would your answer change if the cost of capital were 10 percent?

INVESTMENT INVESTMENT COST INTERNAL RATES OF RETURN

A $275,000 17.50%

B 325,000 15.72

C 550,000 14.25

D 400,000 11.65