Welch Company is considering three independent projects, each of which requires

Question

Welch Company is considering three independent projects, each of which requires a $4 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 = 17% IRR = 20%

Project M (Medium risk): Cost of capital = 13% IRR = 12%

Project L (Low risk): Cost of capital = 8% IRR = 11%

Note that the projects' costs of capital vary because the projects have different levels of risk. The company's optimal capital structure calls for 40% debt and 60% common equity, and it expects to have net income of $14,127,500. If Welch establishes its dividends from the residual dividend model, what will be its payout ratio? Round your answer to two decimal places.

Explanation / Answer

40% Debt; 60% Equity; Capital Budget = $4,000,000; NI = $14,127,500; PO = ?

Equity retained = 0.6($4,000,000) = $2,400,000.

NI                                $14,127,500

-Additions                       2,400,000

Earnings Remaining $11,727,500

Payout = 11727500/14127500

= 83.01%.

Related Questions

Navigate

• Browse (All)
• Browse W
• Subjects

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