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:

Note that the projects’ 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 (all distributions are in the form of dividends), what will its payout ratio be?

Project H (high risk): Project M (medium risk): Project L (low risk): Cost of capital = 16%; IRR = 20% Cost of capital = 12%; IRR = 10% Cost of capital = 8%; IRR 9%