Problem $2$

A$.$ ABC Inc. has $30,000$ shares of stock outstanding at a price of $$15$ per share and the firm also has $$500,000$ in debt. Earnings for next year are projected at $$90,000$ and the firm plans to spend $$120,000$ on capital projects next year. The firm also wants to keep its current debt$-$equity ratio unchanged.

What is the current debt$-$to$-$equity ratio?

What is the value of dividend per share if the firm follows a residual dividend policy?

B$.$ ABC just sold a branch and collected $$1$ million sale proceeds. The company currently has limited growth opportunities, so it is considering pursuing one of the following proposals as a means to distribute cash to shareholders. Evaluate the proposals below and briefly discuss the pros and cons of each.

a$)$ It could pay an extra cash dividend.

b$)$ It could increase its regular dividend.

c$)$ It could use the money to repurchase stock.