ABC firm has a debt to equity ratio of 2.3 (that they wish to maintain) and new investments would cost $35 million this year. The firm expects earnings of $12 million this year.
a) Calculate the dividends paid and external equity financing required if the firm follows a residual dividend policy. ( 6 marks)
b) Calculate the dividends paid and external equity financing required if the firm has a fixed payout ratio of 25% (4 marks)
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