Merrillan Motors had earnings of $8 million last year. It made $5 million on investment in projects with positive net present values. Pat Collins owns 20% of the firm’s common stock. Assume that Pat desires no change in proportional ownership of Merrillan and the firm wishes to maintain a constant debt-equity ratio.

What will be Pat’s action in response to

a. Merrillan’s paying out dividends of $5 million?

b. Merrillan’s paying out dividends of $1 million?

c. Merrillan’s paying out dividends of $3 million?

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