The Welch Company is considering three independent projects, each of which requires $5 million investment. The estimated internal rate of return IRR and cost of capital for these 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 the project’s cost of capital varies because the projects have different levels of risk. The company’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 the residual model (all distributions are in the form of dividends.) What will its payout ratio be?

Leave a Reply

Your email address will not be published. Required fields are marked *