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Problem:

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 = 18%; IRR = 16%
Project B: Cost of capital = 10%; IRR = 15%
Project C: Cost of capital = 7%; IRR = 10%

Required:

Harris intends to maintain its 55% debt and 45% common equity capital structure, and its net income is expected to be $9,687,000. If Harris maintains its residual dividend policy (with all distributions in the form of dividends), what will its payout ratio be?

Note: Please provide reasons to support your answer.

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Basic Finance, Finance

Category:- Basic Finance
Reference No.:- M91147888

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