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 that the firm's capital 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

$3,000,000

New capital budget

$2,150,000

Net income

$3,500,000

% Debt

35%

Question

Business

Donavan

21 June, 06:40

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 that the firm's capital 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

$3,000,000

New capital budget

$2,150,000

Net income

$3,500,000

% Debt

35%

+1

Answers (1)

Know the Answer?

Devin Kelley · Answer 1

Dividend payout will increase by (1,550,000 - 2,102,500) = $552500

Explanation:

old new

capital budgeting 3000000 2150000

net income 3500000 3500000

equity needed to support capital budgeting

65% 65%

Equity needed = (capital budgeting * equity%) 1950000 1397500

dividend payout = net income - equity needed 1,550,000 2,102,500