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?

Question

Quizplus · Accepted Answer

To determine the amount by which dividends can be increased, we need to find the amount of funds available after funding all the positive NPV projects. From the data given, the total funds available for distribution as dividends are:

$6,840,000 - $2,142,000 = $4,698,000

This is the maximum amount of dividends that can be distributed if all positive NPV projects are funded. However, if the capital budget is reduced to $3,240,000, the amount available for distribution as dividends would be:

$3,240,000 - $2,142,000 = $1,098,000

This is the amount that can be distributed as dividends if the capital budget is reduced to the indicated level. The increase in dividends would, therefore, be:

$1,098,000 - $600,000 = $498,000

Thus, dividends can be increased by $498,000 or approximately $500,000. The closest option is C) $600,000.