Answer:
Dividends would increase by $552500.
Explanation:
Original capital budget $3,000,000
New capital budget $2,150,000
Net income $3,500,000
% Debt 35%
Old New
% Debt 35% 35%
% Equity = 1 – %Debt 65% 65%
Capital budget $3,000,000 $2,150,000
Net income (NI) $3,500,000 $3,500,000
Equity needed to support
the capital budget =
%Equity * Capital budget $1,950,000 $1,397,500
Dividends paid = $1,550,000 $2,102,500
NI - Equity needed
if positive.
Increase in dividends paid = $2,102,500 - $1,550,000 = $552500.
