Question

Walsh Company is considering three independent projects, each of which requires a $4 million investment. The estimated internal rate of return (IRR) and cost of capital for these projects are presented here:

Answer 1

Answer:

27.3134%

Explanation:

Note: The full question is attached as picture below

In this question is concerned, projects to be accepted will be those whose IRR is greater than the cost of capital . The projects H and L have a greater IRR than their Cost of capital.

Under residual dividend model, earnings remaining after meeting all potential projects is distributed as dividend . Funds required for projects H and L = ($4 million * 2) = $8 million

To be financed through equity = $8 million * 65%

To be financed through equity = $5,200,000

Expected net income = $7,154,000

Thus, the dividend = $7,154,000 - $5,200,000 = $1,954,000

The Payout ratio = Dividends / Earnings  = $1,954,000 / $7,154,000 =   0.273134 = 27.3134%