Fundamentals of Financial Management, Concise Edition (MindTap Course List)
9th Edition
ISBN: 9781305635937
Author: Eugene F. Brigham, Joel F. Houston
Publisher: Cengage Learning
expand_more
expand_more
format_list_bulleted
Question
Chapter 14, Problem 5P
Summary Introduction
To calculate: Amount of external equity CC seeks at the beginning to expand its capacity as desire.
Introduction:
External Equity Financing:
When a firm requires funds and it obtains them externally then this will be termed as external equity financing. It is also termed as selling of ownership interest to acquire funds for business.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solutionStudents have asked these similar questions
Coastal Carolina Heating and Cooling Inc. has a 6-monthbacklog of orders for its patented solar heating system. To meet this demand, managementplans to expand production capacity by 45% with a $20 million investment in plant andmachinery. The firm wants to maintain a 35% debt level in its capital structure. It also wantsto maintain its past dividend policy of distributing 55% of last year’s net income. In 2018,net income was $5 million. How much external equity must Coastal Carolina seek at the beginning of 2019 to expand capacity as desired? Assume that the firm uses only debt andcommon equity in its capital structure.
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?
A new company plans to obtain P18 million financing. The company expects to obtain a yearly income of P2 million before interest and taxes. The firm is considering issuing bonds or an equal amount of bonds and preferred stock. The interest rate on bonds is 14 percent. The tax rate is 46 percent. What financing strategy would you recommend??
(with forecasted income statement)
Chapter 14 Solutions
Fundamentals of Financial Management, Concise Edition (MindTap Course List)
Ch. 14 - Prob. 1QCh. 14 - The cost of retained earnings is less than the...Ch. 14 - Would it ever be rational for a firm to borrow...Ch. 14 - Modigliani and Miller (MM), on the one hand, and...Ch. 14 - How would each of the following changes tend to...Ch. 14 - One position expressed in the financial literature...Ch. 14 - Prob. 7QCh. 14 - What is the difference between a stock dividend...Ch. 14 - Most firms like to have their stock selling at a...Ch. 14 - Indicate whether the following statements are true...
Ch. 14 - Prob. 11QCh. 14 - RESIDUAL DIVIDEND MODEL Altamonte...Ch. 14 - Prob. 2PCh. 14 - STOCK REPURCHASES Gamma Industries has net income...Ch. 14 - STOCK SPLIT After a 5-for-1 stock split, Tyler...Ch. 14 - Prob. 5PCh. 14 - RESIDUAL DIVIDEND MODEL Walsh Company is...Ch. 14 - DIVIDENDS Brooks sporting Inc. is prepared to...Ch. 14 - Prob. 8PCh. 14 - ALTERNATIVE DIVIDEND POLICIES In 2015, Keenan...Ch. 14 - RESIDUAL DIVIDEND MODEL Buena Terra Corporation is...Ch. 14 - DIVIDEND POLICY Southeastern Steel Company (SSC)...Ch. 14 - Prob. 1DQCh. 14 - Prob. 2DQCh. 14 - Prob. 3DQCh. 14 - Prob. 4DQCh. 14 - Prob. 5DQCh. 14 - Prob. 6DQ
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
- (Capital structure analysis) The Karson Transport Company currently has net operating income of $498,000 and pays interest expense of $202,000. The company plans to borrow $1.13 million on which the firm will pay 11 percent interest. The borrowed money will be used to finance an investment that is expected to increase the firm's net operating income by $399,000 a year. a. What is Karson's times interest earned ratio before the loan is taken out and the investment is made? b. What effect will the loan and the investment have on the firm's times interest earned ratio? a. What is Karson's times interest earned ratio before the loan is taken out and the investment is made? The times interest earned ratio is nothing times. (Round to two decimal places.)arrow_forwardEagle Sports Products (ESP) is considering issuing debt to raise funds to financeits growth during the next few years. The amount of the issue will be between$35 million and $40 million. ESP has already arranged for a local investmentbanker to handle the debt issue. The arrangement calls for ESP to pay flotationcosts equal to 4 percent of the total market value of the issue.a. Compute the flotation costs that ESP will have to pay if the market valueof the debt issue is $39 million.b. If the debt issue has a market value of $39 million, how much will ESP beable to use for its financing needs? That is, what will be the net proceedsfrom the issue for ESP? Assume that the only costs associated with the issueare those paid to the investment banker.c. If the company needs $39 million to finance its future growth, how muchdebt must ESP issue?arrow_forwardEnergy Plus Limited (EP) is operating in the booming energy sector. The company recognized that to stay competitive it must implement projects which would reduce the cost of products to its customers. EP’s board of directors approved the recommendation to finance the project by issuing new debt. On January 1, 2014, EP issued new bonds which will mature on December 31, 2038. The bonds have a par value of $1,000 and a coupon rate of 12%. Coupon payments are made semi-annually. a) What would be the value of the bonds on December 31, 2018, if the interest rates had risen to 16%? Based on the price of the bond, how would you classify the bond? b) What would be their value on June 30, 2026, if interest rates had fallen to 8%? Based on the price of the bond, how would you classify the bond? c) If the bonds had a value of $860.00 on June 30, 2024, what would be their yield to maturity on that date?arrow_forward
- CURRENT ASSETS INVESTMENT POLICY Calgary Company is thinking of modifying its current assets investment policy. Fixed assets are $600,000, sales are projected at $3 million, the EBIT/sales ratio is projected at 15%, the interest rate is 10% on all debt, the federal-plus-state tax rate is 40%, and Calgary plans to maintain a 50% debt-to-assets ratio. Three alternative current assets investment policies are under consideration: 40%, 50%, and 60% of projected sales. What is the expected return on equity under each alternative?arrow_forwardA new company plans to obtain P18 million financing. The company expects to obtain a yearly income of P2 million before interest and taxes. The firm is considering issuing bonds or an equal amount of bonds and preferred stock. The interest rate on bonds is 14 percent. The tax rate is 46 percent. What financing strategy would you recommend??arrow_forwardHarvey's Industrial Plumbing Supply's target capital structure consists of 40% debt and 60% equity. Its capital budget this year is forecast to be $650,000. It also wants to pay a dividend of $225,000. a. If the company follows the residual dividend policy, how much net income must it earn to meet its capital requirements, pay the dividend, and keep the capital structure in balance? b. Is the residual approach to setting the dividend a good approach? Why or why not?arrow_forward
- Payne Products had $1.6 million in sales revenues in the most recent year and expects sales growth to be 25% this year. Payne would like to determine the effect of various current assets policies on its financial performance. Payne has $1 million of fixed assets and intends to keep its debt ratio at its historical level of 40%. Payne’s debt interest rate is currently 8%. You are to evaluate three different current asset policies: (1) a restricted policy in which current assets are 45% of projected sales, (2) a moderate policy with 50% of sales tied up in current assets, and (3) a relaxed policy requiring current assets of 60% of sales. Earnings before interest and taxes are expected to be 12% of sales. Payne’s tax rate is 25%. What is the expected return on equity under each current asset level? In this problem, we have assumed that the level of expected sales is independent of current asset policy. Is this a valid assumption? Why or why not? How would the overall risk of…arrow_forwardEdsel Research Labs has $28.20 million in assets. Currently half of these assets are financed with long-term debt at 5 percent and half with common stock having a par value of $10. Ms. Edsel, the Vice President of Finance, wishes to analyze two refinancing plans, one with more debt (D) and one with more equity (E). The company earns a return on assets before interest and taxes of 5 percent. The tax rate is 30 percent. Under Plan D, a $7.05 million long-term bond would be sold at an interest rate of 7 percent and 705,000 shares of stock would be purchased in the market at $10 per share and retired. Under Plan E, 705,000 shares of stock would be sold at $10 per share and the $7,050,000 in proceeds would be used to reduce long-term debt. a-1. How would each of these plans affect earnings per share? Consider the current plan and the two new plans. (Round your answers to 2 decimal places.) Earnings per Share Current Plan D Plan E a-2. Which…arrow_forwardTomey Supply Company’s financial statements for the most recent fiscal year are shown below. The company projects that sales will increase by 11 percent next year. Assume that all costs and assets increase directly with sales. The company has a constant 35 percent dividend payout ratio and has no plans to issue new equity. Any financing needed will be raised through the sale of long-term debt. Prepare pro forma financial statements for the coming year based on this information, and calculate the EFN for Tomey. Tomey Supply Company Income Statement and Balance Sheet Income Statement Balance Sheet Revenues $1,768,121 Assets Costs 1,116,487 Current Assets $280,754 EBT 651,634 Net Fixed Assets 713,655 Taxes (35%) 228,072 Total assets $994,409 Net Income $423,562 Liabilities and Equity: Current Liabilities $167,326 Long-term debt 319,456 Common Stock 200,000 Retained Earnings 307,627 Total liabilities…arrow_forward
arrow_back_ios
arrow_forward_ios
Recommended textbooks for you
- Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage LearningCornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage LearningEBK 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
Cornerstones of Financial Accounting
Accounting
ISBN:9781337690881
Author:Jay Rich, Jeff Jones
Publisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
FIN 300 Lab 1 (Ryerson)- The most Important decision a Financial Manager makes (Managerial Finance); Author: AllThingsMathematics;https://www.youtube.com/watch?v=MGPGMWofQp8;License: Standard YouTube License, CC-BY
Working Capital Management Policy; Author: DevTech Finance;https://www.youtube.com/watch?v=yj-XbIabmFE;License: Standard Youtube Licence