The Welch Company is considering three independent projects, each of which requires a $5 million investment. The estimated internal rate of return (IRR) and cost of capital for these projects are presented below:
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Project H (high risk):
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Cost of capital = 16%; IRR = 20%
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Project M (medium risk):
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Cost of capital = 12%; IRR = 10%
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Project L (low risk):
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Cost of capital = 8%; IRR = 9%
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Note that the projects" cost of capital varies because the projects have different levels of risk. The company"s optimal capital structure calls for 50 percent debt and 50 percent common equity. Welch expects to have net income of $7,287,500. If Welch bases its dividends on the residual model, what will its payout ratio be?