Intermediate Financial Management
14th Edition
ISBN: 9780357516782
Author: Brigham, Eugene F., Daves, Phillip R.
Publisher: Cengage Learning
expand_more
expand_more
format_list_bulleted
Videos
Question
Chapter 15, Problem 6P
Summary Introduction
To determine: New external equity needed by company to expand its business as planned.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
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 innew machinery. Gardial plans to maintain its current 30% debt-to-totalassets ratio for its capital structure and to maintain its dividend policy inwhich 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 mustGardial seek now to expand as planned?
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 20% 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 35% 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
$
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 25% 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 35% 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
LA
Chapter 15 Solutions
Intermediate Financial Management
Ch. 15 - Define each of the following terms: a. Optimal...Ch. 15 - How would each of the following changes tend to...Ch. 15 - What is the difference between a stock dividend...Ch. 15 - One position expressed in the financial literature...Ch. 15 - Indicate whether the following statements are true...Ch. 15 - Prob. 1PCh. 15 - Prob. 2PCh. 15 - Dividend Payout
The Wei Corporation expects next...Ch. 15 - Prob. 4PCh. 15 - Prob. 5P
Ch. 15 - Prob. 6PCh. 15 - Stock Split
Suppose you own 2,000 common shares of...Ch. 15 - Stock Split Fauver Enterprises declared a 3-for-1...Ch. 15 - Residual Distribution Policy Harris Company must...Ch. 15 - Prob. 11PCh. 15 - Prob. 12PCh. 15 - Integrated Waveguide Technologies (IWT) is a...Ch. 15 - Prob. 2MCCh. 15 - Assume that IWT has completed its IPO and has a...Ch. 15 - Prob. 4MCCh. 15 - Prob. 5MCCh. 15 - Suppose IWT has decided to distribute $50 million,...Ch. 15 - Prob. 7MCCh. 15 - Prob. 8MCCh. 15 - Prob. 9MC
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- 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 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 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?arrow_forwardExternal 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 $20 million investment in new machinery. Gardial plans to maintain its current 60% 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 40% 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. $ millionarrow_forwardLente, 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 P15 million investment in new machinery. Lente 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 55% of the year’s net income. This year’s net income was P8 million. How much external equity must Lente seek now to expand as planned?arrow_forward
- As the chief financial officer of Adirondack Designs, you have the following information: Next year’s expected net income after tax but before new financing $ 51 million Sinking-fund payments due next year on the existing debt $ 26 million Interest due next year on the existing debt $ 21 million Common stock price, per share $ 33.5 Common shares outstanding 31 million Company tax rate 35% Calculate Adirondack’s times-interest-earned ratio for next year assuming the firm raises $61 million of new debt at an interest rate of 2 percent. Calculate Adirondack’s times-burden-covered ratio for next year assuming annual sinking-fund payments on the new debt will equal $3.0 million. Calculate next year’s earnings per share assuming Adirondack raises the $61 million of new debt. Calculate next year’s times-interest-earned ratio, times-burden-covered ratio, and earnings per share if Adirondack sells 2.6 million new shares at $22 a share instead of raising new debt.arrow_forwardAn overview of a firm's cost of debt For which capital component must you make a tax adjustment when calculating a firm’s weighted average cost of capital (WACC)? Pick the correct choice. A- Preferred stock B- Equity C- Debt Three Waters Company (TWC) can borrow funds at an interest rate of 12.50% for a period of five years. Its marginal federal-plus-state tax rate is 45%. TWC’s after-tax cost of debt is_________% (rounded to two decimal places). At the present time, Three Waters Company (TWC) has 15-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have a current market price of $1,136.50 per bond, carry a coupon rate of 12%, and distribute annual coupon payments. The company incurs a federal-plus-state tax rate of 45%. If TWC wants to issue new debt, what would be a reasonable estimate for its after-tax cost of debt (rounded to two decimal places)? Pick the correct choice. 5.60% 5.04%…arrow_forwardAs the chief financial officer of Adirondack Designs, you have the following information: • Next year's expected net income after tax but before new financing $42 million Sinking-fund payments due next year on the existing debt $15 million • Interest due next year on the existing debt $10 million • Common stock price, per share $28.00 • Common shares outstanding 20 million Company tax rate 30% Calculate the firm's times-interest-earned ratio for next year assuming the firm raises $50 million of new debt at an interest rate of 4 percent. 5.83 4.21 ○ 6.38 O 1.25arrow_forward
- As the chief financial officer of Adirondack Designs, you have the following information: Next year's expected net income after tax but before new financing Sinking-fund payments due next year on the existing debt Interest due next year on the existing debt Common stock price, per share Common shares outstanding Company tax rate $ 38 million $ 13 million $8 million $ 27.0 18 million 30% a. Calculate Adirondack's times-interest-earned ratio for next year assuming the firm raises $48 million of new debt at an interest rate of 4 percent. b. Calculate Adirondack's times-burden-covered ratio for next year assuming annual sinking-fund payments on the new debt will equal $3.5 million. c. Calculate next year's earnings per share assuming Adirondack raises the $48 million of new debt. d. Calculate next year's times-interest-earned ratio, times-burden-covered ratio, and earnings per share if Adirondack sells 1.3 million new shares at $23 a share instead of raising new debt. Note: Do not round…arrow_forwardFirm Valuation Through Excess Returns ApproachThe incorporation of XYZ Inc. was completed through the raising of funds. These funds include net proceeds from debt and from equity at P5,000,000 and P20,000,000 respectively. The after-tax costs of debt and of equity are 9% and 15% in order. If the actual return of XYZ is forecasted to be 17% annually over the firm’s 10-year life, compute the firm value.arrow_forwardPhosfranc Inc. is valuing the equity of a company using the free cash flow from equity, FCFE, approach and has estimated that the FCFE in the next three years will be $6.25, $7.70, and $8.36 million respectively. Beginning in year 4, the company expects the cash flows to increase at a rate of 4 percent per year for the indefinite future. It is estimated that the cost of equity is 12 percent. What is the value of equity in this company? (Do not round intermediate computations. Round final answer to the nearest million.) A) $77 million B) $95 million C) $109 million D) $60 millionarrow_forward
- For which capital component must you make a tax adjustment when calculating a firm’s weighted average cost of capital (WACC)? Equity Debt Preferred stock Water and Power Company (WPC) can borrow funds at an interest rate of 7.30% for a period of five years. Its marginal federal-plus-state tax rate is 25%. WPC’s after-tax cost of debt is (7.30, 5.21, 6.03, 5.48) (rounded to two decimal places). At the present time, Water and Power Company (WPC) has 15-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have a current market price of $1,136.50 per bond, carry a coupon rate of 12%, and distribute annual coupon payments. The company incurs a federal-plus-state tax rate of 25%. If WPC wants to issue new debt, what would be a reasonable estimate for its after-tax cost of debt (rounded to two decimal places)? (Note: Round your YTM rate to two decimal place.) 9.17% 8.79% 7.64% 6.11%arrow_forwardFor which capital component must you make a tax adjustment when calculating a firm’s weighted average cost of capital (WACC)? Equity Preferred stock Debt Water and Power Company (WPC) can borrow funds at an interest rate of 7.30% for a period of four years. Its marginal federal-plus-state tax rate is 25%. WPC’s after-tax cost of debt is 5.48% (rounded to two decimal places). At the present time, Water and Power Company (WPC) has 10-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have a current market price of $1,092.79 per bond, carry a coupon rate of 11%, and distribute annual coupon payments. The company incurs a federal-plus-state tax rate of 25%. If WPC wants to issue new debt, what would be a reasonable estimate for its after-tax cost of debt (rounded to two decimal places)? (Note: Round your YTM rate to two decimal place.) 8.57% 7.14% 5.71% 8.21%arrow_forwardWACC Lancaster Engineering Inc. (LEI) has the following capital structure, which itconsiders to be optimal:Debt 25%Preferred stock 15Common equity 60100%LEI’s expected net income this year is $34,285.72; its established dividend payout ratiois 30%; its federal-plus-state tax rate is 40%; and investors expect future earnings anddividends to grow at a constant rate of 9%. LEI paid a dividend of $3.60 per share last year,and its stock currently sells for $54.00 per share.LEI can obtain new capital in the following ways:l Preferred: New preferred stock with a dividend of $11.00 can be sold to the public at aprice of $95.00 per share.l Debt: Debt can be sold at an interest rate of 12%.a. Determine the cost of each capital component.b. Calculate the WACC. c. LEI has the following investment opportunities that are average-risk projects:Project Cost at t = 0 Rate of ReturnA $10,000 17.4%B 20,000 16.0C 10,000 14.2D 20,000 13.7E 10,000 12.0Which projects should LEI accept? Why?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Discounted cash flow model; Author: Edspira;https://www.youtube.com/watch?v=7PpWneOBJls;License: Standard YouTube License, CC-BY