The Scanlon Company’s optimal capital structure calls for 50 percent debt. The interest rate on its debt is a constant 10 percent; its cost of common equity from retained earnings is 14 percent; the cost of equity from new stock is 17 percent; and its marginal tax rate is 40 percent. Scanlon has the following investment opportunities:
Project A: Cost = $5 million; IRR = 20%
Project B: Cost = $5 million; IRR = 12%
Project C: Cost = $5 million; IRR = 11%
Scanlon expects to have net income of $7,287,500. If Scanlon bases its dividends on the residual policy, what will its payout ratio be?

  • CreatedNovember 24, 2014
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