Illustrate what will its payout ratio be

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Reference no: EM1374763

Q. Welch Business is considering 3 independent projects, each of which requires $5 million investment. Approximated internal rate of return IRR and cost of capital for se projects are presented below:

Project H (High Risk) Cost of Capital= 16% IRR= 20%
Project M (Medium Risk) Cost of Capital= 12% IRR= 10%
Project L (Low Risk) Cost of Capital= 8% IRR= 9%

Note project's cost of capital varies because projects have different levels of risk. Business's optimal capital structure calls for 50% debt and 50% common equity. Welch expects to have net income of 7,287,500. If Welch bases its dividends on residual model (all distributions are in form of dividends.) Illustrate what will its payout ratio be?

 

Reference no: EM1374763

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