Dividend payout ratio using residual model
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The Audino Construction Company is considering 3 independent projects, each of which requires a $5 million investment. The estimated IRR and cost of capital for these projects are provided below:
Project H (High Risk), CofC = 16%, IRR = 20%
Project M (Medium Risk), CofC = 12%, IRR = 10%
Project L (Low Risk), CofC = 8%, IRR = 9%
Note that the projects' cost of capital varies because the projects have different levels of risk. The firm's optimal capital structure calls for 50% debt and 50% common equity. Audino expects to have net income of $7,287,500.
If Audino bases its dividends on the residual model, what will its payout ratio be?
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Solution Summary
The solution explains how to calculate the dividend payout ratio under the residual dividend policy
Solution Preview
We first select the projects that will be accepted.
Project M will be rejected since the IRR is less than the cost ...
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