The Scanlon Company’s optimal capital structure calls for 50 percent debt and 50 percent common equity. The interest rate on its debt, rd, is a constant 10 percent; its cost of common equity from retained earnings, rs, is 14 percent; the cost of equity from new stock is re, is 16 percent; and its marginal tax rate is 40 percent.
Scanlon has the following investment opportunities:
Project A: Cost = $5 million; IRR = 20%
Project B: Cost = $5 million; IRR = 12 %
Project C: Cost = $5 million; IRR = 9%
Scanlon expects to have net income of $7,278,500. If Scanlon bases its dividend on the residual dividend policy, what will its payout ratio be?
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