Question

Whitman Antique Cars Inc. has the following data, and it follows the residual dividend model. Some Whitman family members would like more dividends, and they also think budget includes too many projects whose NPVs are close to zero. If Whitman reduced its capital budget to the indicated level, by how much could dividends be increased holding other things constant? Original capital budget New capital budget Net income %Debt $3,000,000 $1,900,010 $3,500,000 30% O a. $484,100 O b. $493,500 С. $404,200 O d. $521,700 O e. $470,000 0- Icon Key

Answer 1

old new

% debt- 30% 30%

% equity 70% 70%

capital budget 3000000 1900000

net income (NI) 3500000 3500000

equity needed to support the capital budget=% equity× capital budget 2100000 1330000.

Dividend paid= NI- equity needed if positive( otherwise 0)

1400000 2170000

Increase in dividend paid=$ 770000