question archive Wayland Baptist University, LubbockFINA 3309 Quantitative Problem: Lane Industries is considering three independent projects, each of which requires a $2
Wayland Baptist University, LubbockFINA 3309 Quantitative Problem: Lane Industries is considering three independent projects, each of which requires a $2
Subject:FinancePrice:3.87 Bought7
Wayland Baptist University, LubbockFINA 3309
Quantitative Problem: Lane Industries is considering three independent projects, each of which requires a $2.3 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 = 13% IRR = 15%
Project M (medium risk): Cost of capital = 10% IRR = 8%
Project L (low risk): Cost of capital = 9% 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 40% debt and 60% common equity, and it expects to have net income of $4,100,000. If Lane establishes its dividends from the residual dividend model, what will be its payout ratio? Round your answer to two decimal places.
____________ %
Purchase A New Answer
Custom new solution created by our subject matter experts
GET A QUOTE
Answer Preview
Answer:
if firm follows residual dividend model, payout ratio will be 32.68%
Step-by-step explanation
Only that project will be chosen that have Cost of capital less than Internal rate of return.
Project H and Project L has cost of capital less than IRR. So only investment will be made in Project H and Project L
Total investment required for two projects =2300000*2 = 4600000
Equity portion of capital budget =60% of 4600000 =2760000
equity portion will be financed with retained earnings.
Residual dividend after financing budget through retained earnings = Net income - equity portion of budget
=4100000-2760000
=1340000
Payout ratio = dividend /net income
=1340000/4100000
=0.3268292683
or 32.68%
So if firm follows residual dividend model, payout ratio will be 32.68%
