What will payout ratio be next year

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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%

Problem 1: 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: EM132920000

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