Marginal interest rate on the debt

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Reference no: EM13963179

GL Corporation, a retail firm, is making a decision on how much it should pay out to its stockholders. It has $100 million in investible funds. The following information is provided about the firm:

It has 100 million shares outstanding, each share selling for $15. The beta of the stock is 1.25 and the risk-free rate is 8 percent. The expected return on the market is 16 percent.
The firm has $500 million of debt outstanding. The marginal interest rate on the debt is 12 percent.
The corporate tax rate is 50 percent.
The firm has the following investment projects:

Project	Investment Requirement	After-Tax Return on Capital
A	$15 million	27%
B	$10 million	20%
C	$25 million	16%

D	$20 million	14%
E	$30 million	12%

The firm plans to finance all its investment needs at its current debt ratio.

a. Should the company return money to its stockholders?

b. If so, how much should be returned to stockholders?

Reference no: EM13963179

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