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The Scanlon Company's optimal capital structure calls for 50 percent debt and 50 percent common equity.

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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Finance-8091749.xls

Net income projected
7,278,500
D/E Target
1 (E/V=50%, D/V=40%)
Capital Budgeted
10,000,000 WACC Maximum capital spending with no outside equity
0.5*C=7278500
C=7278500/0.5
C
14,557,000 Since...

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