Question
Modigliani Inc. expects to have net income of $5,000,000 during the next year. The companys target capital structure is 30% of debt and 70% of
Modigliani Inc. expects to have net income of $5,000,000 during the next year. The companys target capital structure is 30% of debt and 70% of equity. The companys director of capital budgeting is considering three independent projects, each of which requires a $3,000,000 investment. The estimated internal rate of return and cost of capital for these projects are presented below:
Project H (high risk): Cost of capital = 14%; IRR = 12%
Project M (medium risk): Cost of capital = 10%; IRR = 11%
Project L (low risk): Cost of capital = 6%; IRR = 8%
(Note that the projects cost of capital varies because they have different levels of risk.)
If the firm strictly follows a residual distribution policy (with all distributions in the form of dividends) to determine the coming years dividend, what would be the firms payout ratio?
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