Lenberg Lens Company believes in the dividends-as-a-residual philosophy of dividend policy. This year's earnings are expected to total $10 million. A very conservative company, Lenberg is financed solely with common stock. The required rate of return on retained earnings is 12 percent, whereas the cost of newly raised capital is14 percent because of issuance costs.
a. If Lenberg has $6 million of investment projects having expected returns greater than 12 percent, what total amount of dividends should Lenberg pay?
b. If Lenberg has $12 million of investment projects having expected returns greater than 14 percent, what total amount of dividends should Lenberg pay?
c. What factors, other than its belief in the residual theory of dividends, should Lenberg consider in setting its dividend policy in part b?