Lane Industries is considering three independent projects, each of which requires a $1.7 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 = 13% IRR = 15% Project M (medium risk): Cost of capital = 10% IRR = 8% Project L (low risk): Cost of capital = 9% IRR = 10% 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 $4,000,000. If Lane establishes its dividends from the residual dividend model, what will be its payout ratio? Round your answer to 2 decimal places.
| Project H | Project M | Project L | |
| Cost of capitaL | 13% | 10% | 9% |
| IRR | 15% | 8% | 10% |
| Investment | 1,700,000 | 1,700,000 | 1,700,000 |
| Capita; Structure | |||
| Debt 40% | 680000 | 680000 | 680000 |
| Equity 60% | 1020000 | 1020000 | 1020000 |
| Net Income | 4,000,000 | 4,000,000 | 4,000,000 |
| Less: | |||
| Interest Payment to Debt |
88400 | 68000 | 61200 |
| (680000*Cost of Capital of the particular Project) |
|||
| Remaing amount paid to Equity | 3,911,600 | 3,932,000 | 3,938,800 |
| This procet Not Accepted as IRR is less then Cost of capital |
|||
| Devidend Payout Ratio =Devidend/ Net Income |
0.9779 | 0.983 | 0.9847 |
Project L Should be accepted as Devidend Payout ratio is higher in this project
