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15-9: 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: 14% Project C: Cost of capital: 7%; IRR: 9% Haris intends to maintain its 35% debt and 65% common equity capital structure, and its net income is expected to be $7,500,000. If Harris maintains its residual dividend policy (with all distributions in the form of dividends), what will its payout ratio be?

Respuesta :

Tundexi

Answer:

Its payout ratio will be 22%

Explanation:

Residual dividend policy is a policy where a company uses the residual equity to fund dividend payments.

Accept Project A, B and C as they all have higher Cost of capital than the IRR

The total investment = $3,000,000 * 3 = $9,000,000

Dividend = Earnings - Investment in equity = $7,500,000 - 65%*$9,000,000 = $7,500,000 - $5,850,000 = $1,650,000

Dividend payout ratio = Dividend / Total earnings = $1,650,000 / $7,500,000 = 0.22 = 22%

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