1. The Welch Company is considering three independent projects, each of which requires a $5 million investment. The estimated internal rate of return (IRR) and cost of capital for these projects are presented below:

Project H (high risk) Cost of capital = 16%; IRR = 20%

Project M (medium risk) Cost of capital = 12%; IRR = 10%

Project L (low risk) Cost of capital = 8%; IRR = 9%

Note that the project's cost of capital varies because the projects have different levels of risk. The company's optimal capital structure calls for 50 percent debt and 50 percent common equity. Welch expects to have net income of $7,287,500. If Welch bases its dividends on the residual model, what will its payout ratio be?

1. Gamma Medical's stock trades at $90 a share. The company is contemplating a 3-for-2 stock split. Assuming that the stock split will have no effect on the market value of its equity.

What will be the company's stock price following the stock split?

1. How would each of the following changes tend to affect aggregate (that is, the average for all corporations) payout ratios, other things held constant? Explain your answers.
2. An increase in the personal income tax rate.
3. A liberalization of depreciation for income tax purposes- that is, faster tax write-offs.
4. A rise in interest rates.
5. An increase in corporate profits.
6. Jayco Inc. wants to maintain its target capital structure at 30% debt and 70% equity. The company forecasts that its Net Income this year will be $1,000. Jayco anticipates a dividend payout ratio of 40%. Without raising additional external equity what is the size of Jayco's capita budget?
7. State and explain the three theories of investor preference for dividends