The Welch Company is considering three independent projects, each of which requi

Question

The Welch Company is considering three independent projects, each of which requires a $5 million investment. The estimated internal rate of return (IRR) and cost of capital for these projects is presented below:

Project H (High risk): Cost of capital = 16%; IRR = 20%
Project M (Medium risk): Cost of capital = 12%; IRR = 10%
Project L (Low risk): Cost of capital = 8%; IRR = 9%

Note that the projects' cost of capital vary because the projects have different levels of risk. The company's optimal capital structure calls for 50% debt and 50% common equity. Welch expects to have net income of $7,287,500. If Welch bases its dividends on the residual model, what will be its payout ratio?

Explanation / Answer

You know something is screwed up when you have to answer your own question because someone on cramster is so wrong its ridiculous. Dividends = Net income - needed equity = $7,287,500 - $5,000,000 = $2,287,500. Payout ratio = $2,287,500/$7,287,500 = 0.3139 = 31.39%.

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.