Problem 14-6 External Equity Financing Gardial GreenLights, a manufacturer of en
ID: 2720587 • Letter: P
Question
Problem 14-6
External Equity Financing
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 $20 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 it distributes 40% 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.
$ million
Explanation / Answer
Total investment required = $20 million
Debt = 30% = $6 million
Equity = 70% = $14 million
Retention this year (internal eqquity) = 8 * (1 - 0.4) = $4.8 million
Therefore, external equity required = 14.0 - 4.8 = $9.2 million