The project agreed by the equity holder. Introduction: Equity is the total value of assets less than the total amount of all liabilities in a company. Debt is a sum of money borrowed by a person from another. Debt is borrowed by companies and individuals to make a large purchase or to develop business. Debt is an amount that has to be repaid back at a later date, with interest.

Question

A firm has two independent projects, each requiring investment of INR 3 million, but each of these have different risk profiles, i.e., different costs of capital as below: Project A 17%, Project B 7% IRRs for A and B are 20% and 9% respectively. The firm would maintain a 30:70 debt-equity ratio and expects its net income to be 6 million INR. If this firms maintains a residual dividend policy (all cash distributed as dividends), what will be the pay-out ratio for this firm?

Answer 1

Question

Chapter 16, Problem 19P

a)

Summary Introduction

To determine: The project agreed by the equity holder.

Introduction:

Equity is the total value of assets less than the total amount of all liabilities in a company.

Debt is a sum of money borrowed by a person from another. Debt is borrowed by companies and individuals to make a large purchase or to develop business. Debt is an amount that has to be repaid back at a later date, with interest.

b)

Summary Introduction

To determine: The cost of firm’s debt project

Introduction:

The effective tax rate is the normal tax assessment rate for a partnership or person. The effective tax rate for people is the normal rate at which their earned income is taxes, and the effective tax rate for an organization is the normal rate at which its pre-charged taxes are taxed.

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