Gardial GreenLights, a manufacturer of energy efficient lighting solutions, has
ID: 2634617 • 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 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 55% 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?Explanation / Answer
Current Debt to total Asset ratio = 30%
Amount to be financed with equity = $15mn x 0.7 = $ 10.5mn
Retained Earnings = Net income * (1 - payout ratio) = $8mn(1-0.55) = $3.6 mn
New equity required to finance debt and keep the same capital structure:
$10.5mn - $3.6mn = $6.9mn
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