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    Grant Groceries

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    Md. Habibullah
    Grant Grocers is considering five investment projects with IRRs ranging from 10-12%. It has a 50% debt/50% equity capital structure with costs of 8% and 13.5% respectively, giving a WACC of 10.75%. As the project IRRs exceed the WACC, the company should invest the $3.4 million available for the three highest IRR projects. This would leave $800,000 in residual profit to pay out as dividends, giving a payout ratio of 32%.

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    Grant Groceries

    Uploaded by

    Md. Habibullah
    473 views1 page
    Grant Grocers is considering five investment projects with IRRs ranging from 10-12%. It has a 50% debt/50% equity capital structure with costs of 8% and 13.5% respectively, giving a WACC of 10.75%. As the project IRRs exceed the WACC, the company should invest the $3.4 million available for the three highest IRR projects. This would leave $800,000 in residual profit to pay out as dividends, giving a payout ratio of 32%.

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    Grant Grocers is considering five investment projects with IRRs ranging from 10-12%. It has a 50% debt/50% equity capital structure with costs of 8% and 13.5% respectively, giving a WACC of 10.75%. As the project IRRs exceed the WACC, the company should invest the $3.4 million available for the three highest IRR projects. This would leave $800,000 in residual profit to pay out as dividends, giving a payout ratio of 32%.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
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    473 views1 page

    Grant Groceries

    Uploaded by

    Md. Habibullah
    Grant Grocers is considering five investment projects with IRRs ranging from 10-12%. It has a 50% debt/50% equity capital structure with costs of 8% and 13.5% respectively, giving a WACC of 10.75%. As the project IRRs exceed the WACC, the company should invest the $3.4 million available for the three highest IRR projects. This would leave $800,000 in residual profit to pay out as dividends, giving a payout ratio of 32%.

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    Q # 1: Grant Grocers is considering the following independent, average-risk investment projects:

    Project Size of Project Project IRR


    Project V $1.0 million 12.0%
    Project W 1.2 million 11.5
    .5Project X 1.2 million 11.0
    Project Y 1.2 million 10.5
    Project Z 1.0 million 10.0
    The company has a target capital structure that consists of 50 percent debt and 50 percent equity. Its after-tax
    cost of debt is 8 percent, its cost of equity is estimated to be 13.5 percent, and its net income is $2.50 million. If
    the company follows a residual dividend policy, what will be its payout ratio?

    Answer:

    Given Information

    WD= 0.5, WE=0.5, Kd= 0.08, Ke= 0.135

    WACC= (WD*Kd)+(WE*Ke)

    = (0.5*0.08)+(0.5*0.135)

    =0.1075

    =10.75%

    IRR of these project is avobe the WACC . So Investment should be =($1M+$1.2M+$1.2M)

    = $3.4M

    So residual profit after profitable investment= ($2.5M-$1.7M)=$0.8M

    So Dividend payout ratio= $0.8M/$2.5M=0.32

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