RESIDUAL DIVIDEND MODEL 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 are presented here:
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Project H (high risk): |
Cost of capital = 16% |
IRR = 20% |
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Project M (medium risk): |
Cost of capital = 12% |
IRR = 10% |
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Project L (low risk): |
Cost of capital = 8% |
IRR = 9% |
The company’s optimal capital structure calls for 50% debt and 50% common equity. Welch expects to have net income of $7,287,500. If Welch establishes its dividends from the residual model, what will be its payout ratio?