LimeAde, a large soft drink manufacturing firm, is faced with the decision of how much to pay out as dividends to its stockholders. It expects to have a net income of $1,000 (after depreciation of $500), and it has the following projects:
|
Project
|
Initial Investment
|
Beta
|
IRR (to Equity Inve
|
|
A
|
$500
|
2.0
|
21%
|
|
B
|
$600
|
1.5
|
20%
|
|
C
|
$500
|
1.0
|
12%
|
The firm's beta is 1.5 and the current risk-free rate is 6 percent. The firm plans to finance net capital expenditures (Cap Ex - Depreciation) and working capital with 20 percent debt. The firm also has current revenues of $5,000, which it expects to grow at 8 percent.
Working capital will be maintained at 25 percent of revenues. How much should the firm return to its stockholders as a dividend?