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Question
The Clydesdale Corporation has an optimal capital structure consisting of 70 percent debt and 30 percent equity. The marginal cost of capital is calculated to be 14.75 percent. Total earnings available to common stockholders for the coming year total $1,200,000. Investment opportunities are:| Project | Investment | IRR (%) |
| A | $1,000,000 | 22 |
| B | $750,000 | 18 |
| C | $1,250,000 | 15 |
| D | $500,000 | 14 |
a. According to the residual dividend theory, what should the firm's total dividend payment be?
b. If the firm paid a total dividend of $675,000, and restricted equity financing to internally generated funds, which projects should be selected? Assume the marginal cost of capital is constant.
Answer
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