Question: InTech Corporation, a computer software firm which 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 finances its future capital investment needs using 20% debt.
a. Which of these projects should the firm accept?
b. How much (if any) should the firm pay out as dividends?