Gardial GreenLights, a manufacturer of energy efficient lighting solutions, has
ID: 2731716 • Letter: G
Question
Gardial GreenLights, a manufacturer of energy efficient lighting solutions, has had such success with its new products that it is planning to substantially expand its manufacturing capacity with a $15 million investment in new machinery. Gardial plans to maintain its current 60% debt-to-total-assets ratio for its capital structure and to maintain its dividend policy in which at the end of each year it distributes 35% of the year's net income. This year's net income was $8 million. How much external equity must Gardial seek now to expand as planned? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places.
Explanation / Answer
Amount to be invested = $15 Million
Amount to be financed through debt = 60% of $15 Million = 9 Million
Amount to be financed through equity = 40% of $15 Million = 6 Million
Net Income = $8 Million
Dividend as perecntage to income = 35%
Amount of dividend to be paid = 35% of 8 Million = $2.8 Million
Net income available to finance the investment in new machinery = 8 Million - 2.8 Million
= 5.2 Million
External Equity Needed = 6 Million - 5.2 Millon = 0.8 Million
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