Please help me answer the followng RESIDUAL DIVIDEND MODEIL Walsh Company is con

Question

Please help me answer the followng

RESIDUAL DIVIDEND MODEIL 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 t'szd:or.ail:17% Cost of capital = 15% Cost of capital = 7% IRR ::19%, Project H (high risk): Project M (medium risk): Project L (low risk) IRR = 12% IRR 10% 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 $11,890,500. Ir Walsh establishes its dividends from the residual dividend model, what will be its payout ratio? Round your answer to two decimal places.

Explanation / Answer

Since, one projects IRR is lower than the cost of capital, it will be dropped from the investment plan.

Total Capital Requirement = $3x2 =$6 million

Equity Ratio =75%

Equity Required =$6x0.75 =$4.50 million

Net Income =$11,890,500

Dividends to be paid =Net Income - Required Equity

                             =$11,890,500 - 4,500,000

                             =$7,390,500

Payout Ratio = 7,390,500/11,890,500x100 =62.15%

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