Question

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 company's optimal capital structure calls for 55% debt and 45% common equity, and it expects to have net income of $14,080,500. If Walsh establishes its dividends from the residual dividend model, what will be its payout ratio? Round your answer to two decimal places, 80.82 Hide Feedback Incorrect

Answer 1

solution: Project which has IRR greater than cost of capital should be accepted. Hence required investment would be $12 million (Project H and Project L) Equity financing 12*45% 5,400,000 Dividend Net income Investment 14080500-5400000 8680500 Payout ratio-Dividend/Net income 8680500/14080500 61.65%