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 $10 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 $1.23 million should be entered as 1.23, not 1,230,000. Round your answer to two decimal places.

$ ____million

Answer 1

Solution.>

Investment in New Machinery (For Expansion ) = $10,000,000

Debt ratio = 35%

Debt that can be raised as per target Debt Ratio => 10,000,000*35%

=> $3,500,000

Equity Financing => $10,000,000-$3,500,000

=> $6,500,000

Retained Earnings (Internal Equity Fianacing) => 8000,000*45%

=> $3,600,000

External Equity Financing => $6,500,000 – $3,600,000

=> $2,900,000 or $2.90 million

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