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Quantitative Problem: Lane Industries is considering three independent projects, each of which requires a $2.4 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 = 14% IRR = 16% Project M (medium risk): Cost of capital = 9% IRR = 7% Project L (low risk):
Cost of capital = 9% IRR = 10% 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 $4,200,000.
If Lane establishes its dividends from the residual dividend model, what will be its payout ratio? Round your answer to 2 decimal places.
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