InTech, a computer software firm that has never paid dividends before, is considering whether it should...

 

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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 percent and a cost of debt of 10 percent (the tax rate is 35 percent). 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: Project A B Depreciation (annual) Initial Investment Annual EBIT Salvage Lifetime $10 million $1 million $40 million $5 million $50 million $ 5 million C The firm plans to finances its future capital investment needs using 20 percent debt. $500 thousands 2.5 years $800 thousands $1 million $2.5 million 10 years $10 million 10 years $10 million a. Which of these projects should the firm accept? b. How much (if any) should the firm pay out as dividends? 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 percent and a cost of debt of 10 percent (the tax rate is 35 percent). 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: Project A B Depreciation (annual) Initial Investment Annual EBIT Salvage Lifetime $10 million $1 million $40 million $5 million $50 million $ 5 million C The firm plans to finances its future capital investment needs using 20 percent debt. $500 thousands 2.5 years $800 thousands $1 million $2.5 million 10 years $10 million 10 years $10 million a. Which of these projects should the firm accept? b. How much (if any) should the firm pay out as dividends?