1. Assumed a 2-period case with perfect certainty and perfect capital market. Last year your company has made $700 million in Earnings. Now (time 0), as a corporate manager, you have to decide how much earnings should be retained and how much to pay out as dividends. The table below shows the firm's production opportunities consisting of 6 independent projects. The risk-free interest rate is 15% pa. Show your investment-dividend decision in a graphical form. Explain 1) how you know that the decisions will satisfy all shareholders regardless of their time preferences for consumption 2) what is the main axiom behind your conclusion and 3) what is the value added created by that decision (i.e., compared to paying all earnings out as current dividend)? Project Initial Investment ($ mio at t,) Future Payoff ($ mio at t,) A 100 140 B 100 105 C 100 180 D 100 110 E 100 200 F 100 120

1. Assumed a 2-period case with perfect certainty and perfect capital market. Last year your company has made $700 million in Earnings. Now (time 0), as a corporate manager, you have to decide how much earnings should be retained and how much to pay out as dividends. The table below shows the firm's production opportunities consisting of 6 independent projects. The risk-free interest rate is 15% pa. Show your investment-dividend decision in a graphical form. Explain 1) how you know that the decisions will satisfy all shareholders regardless of their time preferences for consumption 2) what is the main axiom behind your conclusion and 3) what is the value added created by that decision (i.e., compared to paying all earnings out as current dividend)? Project Initial Investment ($ mio at t,) Future Payoff ($ mio at t,) A 100 140 B 100 105 C 100 180 D 100 110 E 100 200 F 100 120

ECON MICRO

5th Edition

ISBN:9781337000536

Author:William A. McEachern

Publisher:William A. McEachern

Chapter13: Capital, Interest, Entrepreneurship, And Corporate Finance

Section: Chapter Questions

Problem 1.2P

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Question

Please help me

1. Assumed a 2-period case with perfect certainty and perfect capital market. Last year your
company has made $700 million in Earnings. Now (time 0), as a corporate manager, you have
to decide how much earnings should be retained and how much to pay out as dividends. The
table below shows the firm's production opportunities consisting of 6 independent projects.
The risk-free interest rate is 15% pa. Show your investment-dividend decision in a graphical
form. Explain 1) how you know that the decisions will satisfy all shareholders regardless of their
time preferences for consumption 2) what is the main axiom behind your conclusion and 3)
what is the value added created by that decision (i.e., compared to paying all earnings out as
current dividend)?
Project
Initial Investment ($ mio at t,)
Future Payoff ($ mio at t,)
A
100
140
100
105
C
100
180
D
100
110
E
100
200
100
120

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