Gardial GreenLights, a manufacturer of energy efficient lighting solutions, has
ID: 2650714 • 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 50% 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.
Explanation / Answer
Answer
It is given in the question that Gardial GreenLights is planning to expand its manufacturing capacity with a $ 15 million investment in new machinery. To caluculate the required value of external equity that Gardial must seek we must consider the figures;
Therefore, requirement of funds to be raised from external equity shall be as under;
External Equity Financing = Total Investment in New Machinery
- Funds available from retained earnings
- Debt financing
= $ 15 million - $ 3.6 million - $ 7.5 million
= $ 3.9 million
Thus, Gardial shall now seek $ 3.90 million from external equity to expand as planned.
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