Question

Residual Distribution Policy Harris Company must set its investment and dividend policies for the coming year....

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 = 16%
Project B: Cost of capital = 13%; IRR = 11%
Project C: Cost of capital = 8%; IRR = 10%

Harris intends to maintain its 45% debt and 55% common equity capital structure, and its net income is expected to be $11,750,000. 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.

____%

Homework Answers

Answer #1

Solution for Harris Company.>

A residual dividend policy is one where a company uses residual or leftover equity to fund dividend payments.

We will accept projects A and C because their IRR > cost of capital.

Total Investment = $4 million * 2 = $8 million

Dividend = Earnings - Investment in equity

= $11,750,000 - 55%* $8 million

= $11,750,000 -$4,400,000

= $7,350,000

Dividend Payout ratio = Dividend/ Total Earnings

= $7,350,000/$11,750,000

= 62.55%

Note: Give it a thumbs up if it helps! Thanks in advance!

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