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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 are presented here: 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 that the projects’ costs of capital vary because the projects have different levels of risk. The company’s optimal capital structure calls for 50% debt and 50% common equity, and it expects to have net income of $7,287,500. If Welch establishes its dividends from the residual dividend model, what will be its payout ratio?

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Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781285867977
BuyFind

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781285867977

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Chapter
Section
Chapter 15, Problem 6P
Textbook Problem

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 are presented here:

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 that the projects’ costs of capital vary because the projects have different levels of risk. The company’s optimal capital structure calls for 50% debt and 50% common equity, and it expects to have net income of $7,287,500. If Welch establishes its dividends from the residual dividend model, what will be its payout ratio?

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