Question
The Chindimalai Transport has an optimal capital structure consisting of 40% debt and 60% equity. The marginal weighted average cost of capital is calculated to
The Chindimalai Transport has an optimal capital structure consisting of 40% debt and 60% equity. The marginal weighted average cost of capital is calculated to be 15%. Total earnings available to common stockholders for the coming year total $1.2 million. Investment opportunities are:
Project Investment ($) IRR (%)
A $1,200,000 17
B 400,000 18
C 300,000 16
D 200,000 14
a) According to the residual dividend theory, what should the firms total dividend payment be? (8 marks) b) If the firm paid a total dividend of $480,000 and restricted equity financing to internally generated funds, which projects should be selected? Assume the marginal cost of capital is constant.
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