To increase production capacity by 20%, a $3 million investment is needed. The firm wants to maintain a 40% debt-to-asset ratio, and continue to pay 75% of income as dividends. Net Income was $4 million. given Step 1 Analysis The new debt here needed will be New debt =Total investment needed* debt to assets ratio Step 2 Calculation of new debt needed Total investment needed =$3 million debt-to-asset ratio =40% New Debt =$3 million*40% =$1.2 million hence amount of new debt must be issue is $1.2 million . How much new external equity should they issue?
To increase production capacity by 20%, a $3 million investment is needed. The firm wants to maintain a 40% debt-to-asset ratio, and continue to pay 75% of income as dividends. Net Income was $4 million. given Step 1 Analysis The new debt here needed will be New debt =Total investment needed* debt to assets ratio Step 2 Calculation of new debt needed Total investment needed =$3 million debt-to-asset ratio =40% New Debt =$3 million*40% =$1.2 million hence amount of new debt must be issue is $1.2 million . How much new external equity should they issue?
Chapter13: Capital Structure Concepts
Section: Chapter Questions
Problem 6P
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Question
- Need for External Financing
To increase production capacity by 20%, a $3 million investment is needed. The firm wants to maintain a 40% debt-to-asset ratio, and continue to pay 75% of income as dividends. Net Income was $4 million.
given
Step 1 Analysis
The new debt here needed will be
New debt =Total investment needed* debt to assets ratio
Step 2 Calculation of new debt needed
Total investment needed =$3 million
debt-to-asset ratio =40%
New Debt =$3 million*40%
=$1.2 million
hence amount of new debt must be issue is $1.2 million
. How much new external equity should they issue?
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