Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN: 9781337395083
Author: Eugene F. Brigham, Phillip R. Daves
Publisher: Cengage Learning
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Chapter 15, Problem 9P
Residual Distribution Policy
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%;
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), what will its payout ratio be?
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Quantitative Problem: Lane Industries is considering three independent projects, each of which requires a $2.7 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 = 14%
IRR = 16%
Project M (medium risk):
Cost of capital = 9%
IRR = 7%
Project L (low risk):
Cost of capital = 6%
IRR = 7%
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 $3,300,000. If Lane establishes its dividends from the residual dividend model, what will be its payout ratio? Round your answer to two decimal places. %
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 proj- ects 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 struc- ture, 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), what will its payout ratio be?
Quantitative Problem: Lane Industries is considering three independent projects, each of which requires a $3.3 million investment. The estimated internal rate of return (IRR) and cost of capital for these projects are presented here:
Project H (high risk):
IRR = 18%
Cost of capital = 16%
Cost of capital = 11%
Cost of capital = 6%
Project M (medium risk):
Project L (low risk):
IRR = 9%
IRR = 7%
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 expects to have net income of $4,200,000. If Lane establishes its dividends from the residual dividend model, what will be
its payout ratio? Round your answer to two decimal places.
%
Chapter 15 Solutions
Intermediate Financial Management (MindTap Course List)
Ch. 15 - Define each of the following terms: a. Optimal...Ch. 15 - How would each of the following changes tend to...Ch. 15 - What is the difference between a stock dividend...Ch. 15 - One position expressed in the financial literature...Ch. 15 - Indicate whether the following statements are true...Ch. 15 - Prob. 1PCh. 15 - Prob. 2PCh. 15 - Dividend Payout
The Wei Corporation expects next...Ch. 15 - Prob. 4PCh. 15 - Prob. 5P
Ch. 15 - Prob. 6PCh. 15 - Stock Split
Suppose you own 2,000 common shares of...Ch. 15 - Stock Split Fauver Enterprises declared a 3-for-1...Ch. 15 - Residual Distribution Policy Harris Company must...Ch. 15 - Prob. 10PCh. 15 - Prob. 11PCh. 15 - Prob. 12PCh. 15 - Integrated Waveguide Technologies (IWT) is a...Ch. 15 - Prob. 2MCCh. 15 - Assume that IWT has completed its IPO and has a...Ch. 15 - Prob. 4MCCh. 15 - Prob. 5MCCh. 15 - Suppose IWT has decided to distribute $50 million,...Ch. 15 - Prob. 7MCCh. 15 - Prob. 8MCCh. 15 - Prob. 9MC
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