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Dividends = Net income [ (Target equity ratio)(Total capital budget)] Because investment opportunities and earnings wili vary from year to year, strict adherence to this
Dividends = Net income [ (Target equity ratio)(Total capital budget)] Because investment opportunities and earnings wili vary from year to year, strict adherence to this model would result in fuctuating, unstable dividends. However, investors prefer stable, dependable dividends. Consequently, firms should use this model to help set their long-run target payout ratios, but not as a guide to the payout in any ane yeac. Quantitative Problem: Lane industries is considering three independent projects, each of which requires a \$2.6 milion investment. The estimated internal rate of return (IRR) and cost of capital for these projects are presented here: \begin{tabular}{lll} Project H (high risk): & Cost of capital =15% & IRR =17% \\ Project N (medium risk): & Cost of capital =11% & IRR =9% \\ Froject L (low risk): & Cost of capital =10% & IRR =11% \end{tabular} Note that the projects' costs of capital vory becouse the projects have different levels of risk. The company's optimal caputal structure calls for 40% debt and 60% comman equity. and expects to have net theome of $3,200,000. If Lane establishes its dividends from the residual dividend model, what will be its payout ratio? Round your answer to two decimal places
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