Austin Manufacturing is considering three independent projec…
Austin Manufacturing is considering three independent projects that each require an initial investment of $1.50 million. The estimated internal rate of return (IRR) and cost of capital for these projects are presented here: Project 1: cost of capital = 13%, IRR = 16% Project 2: cost of capital = 10%, IRR = 11% Project 3: cost of capital = 16%, IRR = 20% Assume that Austin Manufacturing only pursues positive net present value projects. The company’s optimal capital structure calls for 45% equity. Austin expects to have net income of $3,000,000. a. If Austin establishes its dividend from the residual dividend model, what will be its payout ratio? b. What would be the payout ratio if net income were only $2,250,000?
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