Bass Frozen Foods, Inc has found three acceptable investment opportunities. The three projects require a total
of $5 million in financing. It is the company's policy to finance its investments by using 40% debt and 60%
common equity.
The firm has generated $3.8 million dollars from its operations that could be used to finance the
common equity portion of its investments.
a. What portion of the new investments will be financed by common equity and what portion by debt?
b. According to the residual dividend theory, how much would be paid out in dividends?
a. Common equity = .60 × $5 million = $3,000,000
Debt = .40 × $5 million = $2,000,000
b. Dividends = $3,800,000 - $3,000,000 = $800,000
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