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RESIDUAL DIVIDEND MODEL Walsh Company is considering three independent projects, each of which requires a $4 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=19% Project M (medium risk): Cost of capital=12% IRR=13% Project L (low risk). Cost of capital=9% 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 $7,500,000. If Walsh establishes its dividends from the residual dividend model, what will be its payout ratio?

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Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781337395250
BuyFind

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781337395250

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Chapter
Section
Chapter 15, Problem 6P
Textbook Problem

RESIDUAL DIVIDEND MODEL Walsh Company is considering three independent projects, each of which requires a $4 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=19%
Project M (medium risk): Cost of capital=12% IRR=13%
Project L (low risk). Cost of capital=9% 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 $7,500,000. If Walsh establishes its dividends from the residual dividend model, what will be its payout ratio?

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Chapter 15 Solutions

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