Problem:
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.
Required:
If Whitman reduced its capital budget to the indicated level, by how much could dividends be increased, holding other things constant?
Note: Explain all steps comprehensively.
| Original capital budget |
$3,000,000 |
| New capital budget |
$2,150,000 |
| Net income |
$3,500,000 |
| % Debt |
35% |
|