2. Problem 15.06 (Residual Dividend Model)

eBook Problem Walk-Through

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 = 17%	IRR = 21%
Project M (medium risk):	Cost of capital = 15%	IRR = 13%
Project L (low risk):	Cost of capital = 7%	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 30% debt and 70% common equity, and it expects to have net income of $8,257,000. If Walsh 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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