Dirty Dogs Groomingâs optimal capital structure calls for 40 percent debt and 60 percent common equity. The companyâs weighted average cost of capital (WACC) is 10 percent if the amount of retained earnings generated during the year is sufficient to fund the equity portion of its capital budgeting requirements, whereas its WACC is 14 percent if new common stock must be issued. Dirty Dogs has the following independent investment opportunities:
Project A: Cost = $684,000; IRR = 16%
Project B: Cost = $640,000; IRR = 13%
Project C: cost = $660,000; IRR = 9%
If Dirty Dogs expects to generate net income of $720,000 and it pays dividends according to the residual policy, what will its dividend payout ratio be?
Dirty Dogs Groomingâs optimal capital structure calls for 40 percent debt and 60 percent common equity. The companyâs weighted average cost of capital (WACC) is 10 percent if the amount of retained earnings generated during the year is sufficient to fund the equity portion of its capital budgeting requirements, whereas its WACC is 14 percent if new common stock must be issued. Dirty Dogs has the following independent investment opportunities:
Project A: Cost = $684,000; IRR = 16%
Project B: Cost = $640,000; IRR = 13%
Project C: cost = $660,000; IRR = 9%
If Dirty Dogs expects to generate net income of $720,000 and it pays dividends according to the residual policy, what will its dividend payout ratio be?
Related questions
1.Following are three independent projects Peanut/ Pecan Processing (PPP) is evaluating:
| Project | IRR | RISK |
| P | 10% | Low |
| Q | 12% | Average |
| R | 14.5% | High |
PPP generally considers risk when examining projects by adjusting its average required rate of return, r, which equals 11 percent. A 4 percent adjustment is made for high-risk projects, and a 2 percent adjustment is made for low-risk projects. Which project(s) should PPP purchase?
2.The CFO of Lazy Loungers is evaluating the following independent, indivisible projects:
| Project | Cost | IRR |
| A | $10,000 | 21.0% |
| B | 15,000 | 20 |
| C | 25,000 | 16 |
Lazy's weighted average cost of capital (WACC) is 14 percent if the firm does not have to issue new common equity; if new common equity is needed, its WACC is 17 percent. Lazy's capital structure consists of 40 percent debt. If Lazy has no preferred stock and expects to generate $24,000 in retained earnings this year, which project(s) should be purchased?
