Question
Quantitative Problem: Lane Industries is considering three independent projects, each of which requires a $2.8 million investment. The estimated internal rate of return (IRR) and
Quantitative Problem: Lane Industries is considering three independent projects, each of which requires a $2.8 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 = 14% | IRR = 16% |
Project M (medium risk): | Cost of capital = 10% | IRR = 8% |
Project L (low risk): | Cost of capital = 7% | IRR = 8% |
Note that the projects' costs of capital vary because the projects have different levels of risk. The company's optimal capital structure calls for 40% debt and 60% common equity, and it expects to have net income of $3,700,000. 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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