Using the following financial data, determine the maximum total dividends that can be paid to stockholders before the firm's value would be threatened.Base your answer on the economic value added model.
A) $1,170,000
B) $1,120,000
C) $820,000
D) $570,000
E) $220,000

Question

Using the following financial data, determine the maximum total dividends that can be paid to stockholders before the firm's value would be threatened.Base your answer on the economic value added model. 
A) $1,170,000 
B) $1,120,000 
C) $820,000 
D) $570,000 
E) $220,000

Quizplus · Accepted Answer

The economic value added (EVA) model calculates the value added to the firm by subtracting the cost of capital from the operating profit after tax. The maximum total dividends that can be paid to stockholders is the amount remaining after deducting the cost of capital from the operating profit after tax. 
Here, the operating profit after tax is $2,200,000 and the cost of capital is $1,380,000, so the maximum total dividends that can be paid to stockholders without threatening the firm's value is:
Max dividends = Operating profit after tax - Cost of capital
= $2,200,000 - $1,380,000
= $820,000. 
Therefore, the correct answer is choice C.

Using the Following Financial Data, Determine the Maximum Total Dividends