14-6 External Equity Financing Gardial Green Lights a manufacturer of energy eff
ID: 2720286 • Letter: 1
Question
14-6 External Equity Financing
Gardial Green Lights a manufacturer of energy efficient lightning solutions has had such success with its new products that it is planning to substantially expand it manufacturing capacity with a $15 million investment in new machinery. Gardial plans to maintain its current 30% debt to total assets ratio for its capital structure and to maintain its dividend policy in which at the end of each year its distributes 55% of the years net income. This years net income was $8million. How much external equity must Gardial seek now to expand as planned?--The ANSWER IS $6,9000,000---show all work and formulas to support answer.
Explanation / Answer
Investment in New Machinery (For Expansion ) = $150,00,000
Debt ratio = 30%
Debt that can be raised as per target Debt Ratio = 150,00,000*30%
= $4500,000
Equity Financing = 15000,000-4500,000
= $10500,000
Retained Earnings (Internal Equity Fianacing) = 8000,000*45%
= $3600,000
External Equity Financing = 10500,000 – 3600,000
=$6900,000...ANS
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.