question archive Lane Industries is considering three independent projects, each of which requires a $1
Lane Industries is considering three independent projects, each of which requires a $1
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Lane Industries is considering three independent projects, each of which requires a $1.6 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 = 12% | IRR = 14% |
| Project M (medium risk): | Cost of capital = 11% | IRR = 9% |
| Project L (low risk): | Cost of capital = 7% | IRR = 8% |
Note that the projects' costs of capital vary because the projects have different levels of risk. The company's optimal capital structure calls for 40% debt and 60% common equity, and it expects to have net income of $3,500,000. If Lane establishes its dividends from the residual dividend model, what will be its payout ratio? Round your answer to 2 decimal places.
_____________%
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Answer:
We will select project H and L as IRR is more than Cost of Capital.
Total capital Investment = 1.6 * 2 = 3.2 million
Total equity investment (equity needed) = .6 * 3.2 = 1.92 million
Dividends= Net income - needed equity= $3,500,000 - $1,920,000 = $1,580,000.
Payout ratio= $1,580,000/$3,500,000 = 0.4514285 = 45.14%
