Problem 14-6 External Equity Financing Gardial GreenLights, a manufacturer of en
ID: 2723051 • 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 55% 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 Capital = $20Million
Debt to total Capital Ratio = 55%
Thus debt=55%*20*10^6
Debt=11Million
Equity= 9Million
Now out of this years income 40% will paid as dividend so remainign 60% is available for equity financing.
Income available for equity financing=60%*9
=5.4 Million
Now,External Equity financing= Total equity financing need- Income avaiilable for equity financing
=8-5.4
=2.6million
External Equity financing=$2.6 Million