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.