A firm that strongly believes in their residual dividend policy had investment opportunities worth Rs. 100 Crores. Its earning in the current period was also Rs.100 crores. The target capital structure of the firm involved a debt equity ratio of 1:1. Following its policy, the firm decided to fund the investment opportunities with Rs.50 crores debt and Rs. 50 lakhs from earnings. The remaining Rs.50 lakhs from earnings was distributed as dividend. Do you think that the firm was right in raising debt? What would be the implications on the value of the firm if it had decided to fund the investment entirely with the earnings
A firm that strongly believes in their residual dividend policy had investment opportunities worth Rs. 100 Crores. Its earning in the current period was also Rs.100 crores. The target capital structure of the firm involved a debt equity ratio of 1:1. Following its policy, the firm decided to fund the investment opportunities with Rs.50 crores debt and Rs. 50 lakhs from earnings. The remaining Rs.50 lakhs from earnings was distributed as dividend. Do you think that the firm was right in raising debt? What would be the implications on the value of the firm if it had decided to fund the investment entirely with the earnings
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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A firm that strongly believes in their residual dividend policy had investment opportunities
worth Rs. 100 Crores. Its earning in the current period was also Rs.100 crores. The target capital
structure of the firm involved a debt equity ratio of 1:1.
Following its policy, the firm decided to fund the investment opportunities with Rs.50 crores
debt and Rs. 50 lakhs from earnings. The remaining Rs.50 lakhs from earnings was distributed as
dividend. Do you think that the firm was right in raising debt? What would be the implications
on the value of the firm if it had decided to fund the investment entirely with the earnings?
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