External Equity Financing Gardial GreenLights, a manufacturer of energy efficien
ID: 2650674 • Letter: E
Question
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 $15 million investment in new machinery. Gardial plans to maintain its current 35% 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? 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
Amount of Equity Company would have in Retained Earnings at the year end = Net Income x (1 - Dividend payout ratio)
= 8 x (1 - 0.55) = $3.60 million
Total Equity needed = 15 x (1 - 0.65) = $9.75 million
External Financing = Equity Nedded - Equity already held = 9.75 - 3.60 = $6.15 million
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