InTech, a computer software firm that has never paid dividends before, is considering whether it should start doing so. This firm has a cost of equity of 22% and a cost of debt of 10% (the tax rate is 40%). The firm has $100 million in debt outstanding and 50 million shares outstanding, selling for $10 per share. The firm currently has net income of $90 million and depreciation charges of $10 million. It also has the following projects available:
The firm plans to finance all its investment needs at its current debt ratio.
a. Should the company return money to its stockholders?
b. If so, how much should be returned to stockholders?
The firm plans to finances its future capital investment needs using a 20% debt to capital ratio.
a. Which of these projects should the firm accept?
b. How much (if any) should the firm pay out as dividends?

  • CreatedApril 15, 2015
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