Question 4: (15 marks) The Chindimalai Transport has an optimal capital structure consisting of 40%...
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Question 4: (15 marks) 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 18 300,000 16 D 200,000 14 a) According to the residual dividend theory, what should the firm's 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. (7 marks)
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