Answer (B) is correct . If the cost of capital is 11%, the company will invest in the three projects that have expected returns greater than 11%, which would cost $1,120,000 ($200,000 + $350,000 + $570,000). If 60% of that cost is paid with equity capital, it would require $672,000 of retained earnings ($1,120,000 ¡Á 60%). Subtracting the $672,000 of needed funds from the $1,000,000 available leaves $328,000 for dividends. Answer (A) is incorrect because This amount is the excess of cost ($1,120,000) over the $1,000,000 of retained earnings available. Answer (C) is incorrect because This is the amount that would be left over if only the highest yielding investment (Project C) was purchased entirely from equity funds. Answer (D) is incorrect because This is the amount left if the $1,000,000 of available equity was matched with $400,000 (40%) of debt capital, which is incorrect.
|