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 is presented below:
Project H (High risk): Cost of capital = 15% IRR = 18% Project M (Medium risk): Cost of capital = 12% IRR = 10% 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 40% debt and 60% common equity, and it expects to have net income of $10,491,000. If Welch establishes its dividends from the residual dividend model, what will be its payout ratio? Round your answer to two decimal places.
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 is presented below:
| Project H (High risk): | Cost of capital = 15% | IRR = 18% |
| Project M (Medium risk): | Cost of capital = 12% | IRR = 10% |
| 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 40% debt and 60% common equity, and it expects to have net income of $10,491,000. If Welch establishes its dividends from the residual dividend model, what will be its payout ratio? Round your answer to two decimal places.
Related questions
Lane Industries is considering three independent projects, each of which requires a $1.8 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 = 13% | IRR = 15% |
| Project M (medium risk): | Cost of capital = 9% | IRR = 7% |
| Project L (low risk): | Cost of capital = 10% | 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 $3,500,000. If Lane establishes its dividends from the residual dividend model, what will be its payout ratio? Round your answer to 2 decimal places.
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?
