Sep 25, 2017 term paper 2

RESIDUAL DISTRIBUTION POLICY HARRIS COMPANY MUST SET ITS INVESTMENT AND DIVIDEND POLICIES FOR THE…

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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 $4 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 = 15%; IRR =21%
Project B:Cost of capital = 13%; IRR =12%
Project C:Cost of capital = 7%; IRR =9%

Harris intends to maintain its 40% debt and 60% common equity capital structure, and its net income is expected to be $8,637,000. If Harris maintains its residual dividend policy (with all distributions in the form of dividends), what will its payout ratio be? Round your answer to two decimal places.


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