The HighT Company is a manufacturer of electronic products. The company is preparing a financial plan for the coming year and has the following independent projects under consideration:
Project
Initial investment ($ millions)
Internal rate of return (%)
A
220
20
B
380
11
C
300
15
D
200
19
E
215
8
Assume these projects have the same risk as the overall company and the cost of capital, which is 12%. HighT predicts that earnings in the coming year will be $234 million. The company has 12 million shares outstanding, and maintains a debt-equity ratio of three.
a Determine HighT’s total planned capital expenditure for the coming year. Explain your answer. (8 marks)
b Suppose the company follows a residual dividend policy. What will the dividend per share be? (8 marks)
c What are the major advantages and disadvantages of a strict residual dividend policy? How does a compromise policy differ from a strict residual policy? (9 marks
1 answer