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:

Project H (high risk): Cost of capital = 16% IRR = 20%

Project M (medium risk): Cost of capital = 12% IRR = 10%

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 50% debt and 50% common equity, and it expects to have net income of $7,287,500. If Welch establishes its dividends from the residual dividend model, what will be its payout ratio?

AppendixLO1