Residual dividend model-what will be its payout ratio

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Reference no: EM13917648

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 = 21%

Project M (Medium risk): Cost of capital = 11% IRR = 11%

Project L (Low risk): Cost of capital = 8% 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 55% debt and 45% common equity, and it expects to have net income of $6,752,500.

If Welch establishes its dividends from the residual dividend model, what will be its payout ratio? Round your answer to two decimal places.

Reference no: EM13917648

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