[CeeCee53]

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, 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 $7,287,500. If Scanlon bases its dividends on the residual dividend policy, what will its payout ratio be?

[ma0641]

So far you've posted 3 homework questions. This is a helpline, not a homework do line. Show us your work so far and then we can help.

[CeeCee53]

I am trying to figure out the ratios to use to solve these questions.
At this point I think
I am lost.
I think I have to do net income( 1-payout ration)

[JudyKayTee]

Beat me to it - every post is homework, some questions a lot less complicated than others.

[CeeCee53]

Northern California Heating and Cooling Inc. has a six-month backlog of orders for its patented solar heating system. To meet this demand, management plans to expand production capacity by 35 percent with a $10 million investment in plant and machinery. The firm wants to maintain a 40 percent debt/assets ratio in its capital structure; it also wants to maintain its past dividend policy of distributing 45 percent of the prior year's net income. Last year, net income was $5 million. How much external equity must Northern California seek at the beginning of next year to expand capacity as desired?
This is what I have come up with so far but I am not sure I have done it right

Retained earnings = Net income (1 – Payout ratio)
$5,000,000(1 - .45 =0.55) = $2,750,000.
External equity needed:
Total equity required = (New investment)(1 – Debt ratio)
$10,000,000(1 -.40 =0.60) = $6,000,000.
New external equity needed = $6,000,000 – $2,750,000 = $3,250,000.