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Which projects should reddy company choose

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Reference no: EM132652277

The Reddy Company's optimal capital structure calls for 20% debt and 80% equity. The interest rate on its debt is a constant 11%; its cost of ordinary shares funding from retained earnings is 13%; and its marginal tax rate is 28%. Torrent has the following investment opportunities:

Project Graph: Cost = R34 000,00; IRR = 8.50%.

Project X axis: Cost = R36 000,00; IRR = 9.00%.

Project Y axis Cost = R40 000; IRR = 13.40%.

Project Z axis: Cost = R44 000,00; IRR = 15.70%.

Torrent expects to have a net income of R70 000,00 and bases its dividend payment on the residual policy.

REQUIRED

1. Which projects should Reddy company choose? Justify your answer.

2. How much would Reddy Company pay in dividends (after accepting all profitable projects) if it follows the residual theory of dividends?

Reference no: EM132652277

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