3. Distributions to Shareholders: Residual Dividend Model Quantitative Problem: Lane Industries is considering three independent projects, each
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3. Distributions to Shareholders: Residual Dividend Model
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 = 15% | IRR = 17% |
Project M (medium risk): | Cost of capital = 9% | IRR = 7% |
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 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.
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Related Book For
Project Management Achieving Competitive Advantage
ISBN: 978-0133798074
4th edition
Authors: Jeffrey K. Pinto
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