Based on the readings for this module, solve the following problem. Harris Compa

ID: 2748597 • Letter: B

Question

Based on the readings for this module, solve the following problem.

Harris Company must set its investment and dividend policies for the coming year. It has three independent

projects from which to choose, each of which requires a $ 3 million investments. These projects have different

levels of risk, and therefore different costs of capital. Their projected IRRs and costs of capital are as follows:

Project A: Cost of capital = 17%; IRR = 20%

Project B: Cost of capital = 13%; IRR = 10%

Project C: Cost of capital = 7%; IRR = 9%

Harris intends to maintain its 35% debt and 65% common equity capital structure, and its net income is expected

to be $ 4, 750,000. If Harris maintains its residual dividend policy ( with all distributions in the form of dividends),

what will its payout ratio be?

Debt used to cater capital investment as per company capital structure = 35% * $3,000,000

= $1,050,000

Therefore, capital investment from net income = $3,000,000 - $1,050,000

= $1,950,000

As per residual dividend policy, Dividend paid = $4,750,000 - $1,950,000

= $2,800,000

Now, Dividend payout ratio = $2,800,000 / $4,750,000

= 0.5895

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