LimeAde, a large soft drink manufacturing firm, is faced with the decision of how much to pay out as dividends to its stockholders. It expects to have a net income of $1,000 (after depreciation of $500), and it has the following projects:

The firm€™s beta is 1.5 and the current riskfree rate is 6%. The firm plans to finance net capital expenditures (Cap Ex ˆ’ Depreciation) and working capital with a 20% debt ratio. The firm also has current revenues of $5,000, which it expects to grow at 8%. Working capital will be maintained at 25% of revenues. How much should the firm return to its stockholders as a dividend?

Transcribed Image Text:

Project Initial Investment $500 $600 $500 Beta IRR (to Equity Investors) 2.0 1.5 1.0 21% 20% 12%