You have gathered the following information about a company you are analyzing:
If the company follows a residual dividend policy, what is the company’s payout ratio this year?
after tax cost of debt | cost of debt*(1-tax rate) | 8*(1-.3) | 5.60% | |
cost of equity | 13% | |||
WACC =(weight of debt*after tax cost of debt)+(weight of equity*cost of equity) | (.5*5.6%)+(.6*13%) | 10.60% | ||
Project | Investment | IRR of project | WACC | Accept if IRR> WACC and Reject if IRR<WACC |
1 | A | 12% | 10.60% | Accept |
2 | B | 11.50% | 10.60% | Accept |
3 | C | 10.75% | 10.60% | Accept |
4 | D | 10.15% | 10.60% | Reject |
5 | E | 9.75% | 10.60% | Reject |
total Investment required in three project | 1+1.2+1.2 | 3.4 | ||
Amount required from equity in millions | 3.4*60% | 2.04 | ||
Amount required from debt in millions | 3.4*40% | 1.36 | ||
Amount of EBIT in millions | 3 | |||
amount of equity financed from net income | 2.04 | |||
amount of profit left for dividend | 3-2.04 | 0.96 | ||
Payout ratio = amount left to declare dividend/ebit | .96/3 | 32% |
You have gathered the following information about a company you are analyzing: Expected net income for...
The following information relates to Toronto Ltd: - Net income for the current year is $3 million - The after-tax cost of debt is 4.88% - Target capital structure weightings are 30% debt, 20% preferred, with the remaining amount in equity - The weighted average cost of capital for the firm is 9% - Below is a list of possible capital projects and the company has $15 m of available funds: Project Name Project Size Project IRR YG $3.1 million...
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 $5 million investment. 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 = 15%; IRR = 18% Project B: Cost of capital = 14%; IRR = 9% Project C: Cost of capital = 7%;...
Problem Walk-Through RESIDUAL DIVIDEND MODEL Walsh Company is considering three independent projects, each of which requires a $6 million investment. The estimated internal rate of return (IRR) and cost of capital for these projects are presented here: Project H (high risk): Project M (medium risk): Project L (low risk): Cost of capital-17% Cost of capital-15% Cost of capital = 8% IRR 22% IRR-11% Note that the projects' costs of capital vary because the projects have different levels of risk. The...
RESIDUAL DIVIDEND MODEL Walsh Company is considering three independent projects, each of which requires a $6 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% IRR = 19% Project M (medium risk): Cost of capital = 13% IRR = 10% Project L (low risk): Cost of capital = 7% IRR = 9% Note that the projects' costs of capital vary because...
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 = 16% IRR = 18% Project M (medium risk): Cost of capital = 13% IRR = 12% Project L (low risk): Cost of capital = 7% IRR = 10% Note that the projects' costs of capital vary because the projects have...
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% IRR = 22% Project M (medium risk): Cost of capital = 11% IRR = 13% Project L (low risk): Cost of capital = 7% IRR = 8% Note that the projects' costs of capital vary because the projects have...
Sandwich Company is considering five independent projects, each of the project will require a $10 million investment. The estimated IRR and cost of capital for these projects are presented as follows: Project A Cost of capital = 12% RR = 14% Project B Cost of capital = 14% IRR = 12% Project C Cost of capital = 8% IRR = 10% Project D Cost of capital = 9% IRR = 10% Project E Cost of capital = 16,5% IRR =...
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...
eBook Problem Walk-Through Walsh Company is considering three independent projects, each of which requires a $3 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 = 17% IRR = 22% Project M (medium risk): Cost of capital = 13% IRR = 11% Project L (low risk): Cost of capital = 8% IRR = 10% Note that the projects' costs of capital vary because...
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 below: Project H (High risk) Cost of capital = 15% IRR = 19% Project M (Medium risk) IRR 13% Cost of capital = 12% IRR 11% Cost of capital = 7% Project L (Low risk): Note that the projects' costs of capital vary because the projects have different levels...