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27 September, 12:08

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%

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Answers (1)
  1. 27 September, 12:15
    0
    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
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