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 $20 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 50% 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.

Answer 1

External Equity Needed

• Investment in New Machinery = $2,00,00,000
• Debt-to-total Asset Ratio = 30%
• Equity-to-total asset Ratio = 70% [100% - 30%]
• Equity Needed = $1,40,00,000 [$2,00,00,000 x 70%]
• Current Year Net Income = $80,00,000
• Dividend Pay-out = $40,00,000 [$80,00,000 x 50%]
• Retained Earnings = $40,00,000 [$80,00,000 - $40,00,000]

External Equity Needed

External Equity Needed = Total Equity – Retained Earnings

= $1,40,00,000 - $40,00,000

= $1,00,00,000

= $10 Million (Expressed in Million)

“Hence, the Gardial needed $10 Million in External Equity to expand as planned”