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 $10 million investment in new machinery. Gardial plans to maintain its current 40% 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 30% 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 $1.23 million should be entered as 1.23, not 1,230,000. Round your answer to two decimal places. $ million

Answer 1

Answer:

External Equity Financing = $400,000

Explanation:

Investment in New Machinery for the Expansion = $10,000,000

Debt ratio = 40%

Debt that can be raised as per target Debt Ratio = $10,000,000 * 40%

Debt that can be raised as per target Debt Ratio = $4,000,000

Equity Financing = $10,000,000 - $4,000,000  = $6,000,000

Internal Equity Financing = $8,000,000 * (1 - 30%)

Internal Equity Financing = $8,000,000 * 70%

Internal Equity Financing = $5,600,000

External Equity Financing = Equity Financing - Internal Equity Financing

External Equity Financing = $6,000,000 -  $5,600,000

External Equity Financing = $400,000