Gardial GreenLights, a manufacturer of energy efficient lighting solutions, has

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 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 $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places.

$   million

Explanation / Answer

- Net Income Available after Dividend = Net Income x (1 - Dividend Payout Ratio) = 8 x (1 - 0.30) = $5.60 million

- Total Planned Equity = 15 x (1 - 0.40) = $9 million

- External Financing = Total equity requirement - Accumulated Profits = 9.00 - 5.60 = $3.40 million

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