Y8 Dividends Net income [(Target equity ratio)(Total capital budget)] Because investment opportunities and earnings will vary from

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Dividends Net income [(Target equity ratio)(Total capital budget)] Because investment opportunities and earnings will vary from year to year, strict adherence to this model would result in fluctuating, unstable dividends. However, investors prefer stable, dependable dividends. Consequently, firms should use this model to help set their long-run target payout ratios, but not as a guide to the payout in any one year. Quantitative Problem: Lane Industries is considering three independent projects, each of which requires a $2.6 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): Project L (low risk): Cost of capital 11% Cost of capital 10% IRR-9% IRR 11% 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 $3,200,000. If Lane establishes its dividends from the residual dividend model, what will be its payout ratio? Round your answer to two decimal places. Dividends Net income [(Target equity ratio)(Total capital budget)] Because investment opportunities and earnings will vary from year to year, strict adherence to this model would result in fluctuating, unstable dividends. However, investors prefer stable, dependable dividends. Consequently, firms should use this model to help set their long-run target payout ratios, but not as a guide to the payout in any one year. Quantitative Problem: Lane Industries is considering three independent projects, each of which requires a $2.6 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): Project L (low risk): Cost of capital 11% Cost of capital 10% IRR-9% IRR 11% 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 $3,200,000. If Lane establishes its dividends from the residual dividend model, what will be its payout ratio? Round your answer to two decimal places.

Answer rating: 100% (QA)

ANSWER To determine Lane Industries payout ratio using the residual dividend model we need to calcul... View the full answer