Residual dividend model Welch Company is considering three independent projects,

Question

Residual dividend model

Welch Company is considering three independent projects, each of which requires a $5 million investment. The estimated internal rate of return (IRR) and cost of capital for these projects is presented below:

Note that the projects' costs of capital vary because the projects have different levels of risk. The company's optimal capital structure calls for 30% debt and 70% common equity, and it expects to have net income of $11,583,500. If Welch establishes its dividends from the residual dividend model, what will be its payout ratio? Round your answer to two decimal places.

Project H (High risk): Cost of capital = 15% IRR = 18% Project M (Medium risk): Cost of capital = 11% IRR = 10% Project L (Low risk): Cost of capital = 8% IRR = 8%

Explanation / Answer

Hi,

Please find the answera as follows:

Total Investment = 5 million*2 = 10 million

Dividends = Net Income - (Total Investment*Equity Weight) = 11583500 - 10000000*.70 = 4583500

Dividend Payout Ratio = Dividends/Net Income*100 = 4583500/11583500*100 = 39.57%

Thanks.

Related Questions

Navigate

• Browse (All)
• Browse R
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.