The Scanlon Companys optimal capital structure calls for 50 percent debt and 50 percent common equity. The

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The Scanlon Company’s optimal capital structure calls for 50 percent debt and 50 percent common equity. 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 16 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 = 9%

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?

Capital Structure
Capital structure refers to a company’s outstanding debt and equity. The capital structure is the particular combination of debt and equity used by a finance its overall operations and growth. Capital structure maximizes the market value of a...
Cost Of Equity
The cost of equity is the return a company requires to decide if an investment meets capital return requirements. Firms often use it as a capital budgeting threshold for the required rate of return. A firm's cost of equity represents the...
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Essentials of Managerial Finance

ISBN: 978-0324422702

14th edition

Authors: Scott Besley, Eugene F. Brigham

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