Harris Company must set its investment and dividend policies for the coming year. It has three independent projects from which to choose, each of which requires a $3 million investment. These projects have different levels of risk, and therefore different costs of capital. Their projected IRRs and costs of capital are as follows:

Project A: Cost of Capital = 17%; IRR = 20%
Project B: Cost of Capital = 13%; IRR = 10%
Project C: Cost of Capital = 7%; IRR = 9%

Harris intends to maintain its 35% debt and 65% common equity capital structure, and its net income is expected to be $4,750,000. If Harris maintains its residual dividend policy (with all distributions in the form of dividends).

1. Which project(s) can be accepted and why? (Justify your selection of the projects)

2. What will its payout ratio be?