Clark Farms Inc. has the following data, and it follows the residual dividend model. Currently, it finances with 15% debt. Some Clark family members would like for the dividends to be increased. If Clark increased its debt ratio, which the firm's treasurer thinks is feasible, by how much could the dividend be increased, holding other things constant?

Question

Quizplus · Accepted Answer

To calculate the increase in dividends, we need to first find the current dividend amount:

Dividend per share = ($3,000,000 - $1,050,000) / 200,000 = $14.75

Next, we need to find the new net income and dividend amount after increasing the debt ratio:

New net income = $4,000,000(1 - 0.15) = $3,400,000

New dividends = $3,400,000 - $2,000,000 = $1,400,000

Finally, we can calculate the increase in dividends:

Increase in dividends = $1,400,000/200,000 - $14.75 = $6.25

Multiplying this amount by the number of outstanding shares gives us:

$6.25 x 220,000 = $1,375,000

Therefore, the dividend could be increased by $1,350,000, which is closest to option C.