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What will its payout ratio be next year

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Reference no: EM132989037

Question - Sanitorium Brewing Company (SBC) must set its investment and dividend policies for next year. It can select from three independent projects, each of which will require a $3.5M investment. The projects have different risk levels, so SBC is appropriately evaluating them using different costs of capital. Assuming normal cash flows, the projected IRRs and costs of capital follow:

Cost of Capital IRR

Project A: 17% 20%

Project B: 13% 10%

Project C: 7% 9%

SBC wants to maintain its 40% debt and 60% common equity capital structure, and it expects a net income of $5.0M next year. If SBC also keeps its residual dividend policy (with all distributions as dividends, not share repurchases), what will its payout ratio be next year?

Reference no: EM132989037

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