Question

Walsh 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 are presented here: Project H (high risk): Cost of capital -15% TRR - 22% Project M (medium risk): Cost of capital -11% IRR = 12% Project L (low risk): Cost of capital - 8% TRR = 7% Note that the projects' costs of capital vary because the projects have different levels of risk. The company's optimal capital structure calls for 25% debt and 75% common equity, and it expects to have net income of $13,476,500. If Walsh establishes its dividends from the residual dividend model, what will be its payout ratio? Round your answer to two decimal places

Answer 1

The acceptable policies are those that have IRR>COC.
Hence, Project H and Project M are to be accepted and
Project L is to be rejected.
The required investment = 4000000*2 =	$         80,00,000
Common equity required per the firm's capital structure = 8000000*75% =	$         60,00,000
NI available for dividend distribution per residual dividend policy = 13476500-6000000 =	$         74,76,500
Dividend payout ratio = 7476500/13476500 =	55.48%