Your company, Martin Industries, Inc., has experienced a higher than expected demand for its new product line.
Question:
Your company, Martin Industries, Inc., has experienced a higher than expected demand for its new product line. The company plans to expand its operation by 25% by spending $5,000,000 for an additional building. The firm would like to maintain its 40% debt to total asset ratio in its capital structure and its dividend payout ratio of 50% of net income. Last year, net income was $2,500,000.
Required:
What are retained earnings for last year?
How much debt will be needed for the new project?
How much external equity must Martin use at the beginning of this year in order to finance the new expansion?
If Martin decides to retain all earnings for the coming year, how much external equity will be required?
Part Two: The Degree of Leverage
Assume that two companies, Brake, Inc. and Carbo, Inc., have the following operating results:
| Brake, Inc. | Carbo, Inc. | |
| Sales | $300,000 | $300,000 |
| Variable Costs | 60,000 | 180,000 |
| Fixed Costs | 210,000 | 90,000 |
| Operating Income | $30,000 | $30,000 |
Expert Answer:
Net income 2500000 Dividend payout is 50 retained earnings 25000001501250000 As debt to total asset ratio is 40 new debt needed is 4050000002000000 To... View the full answer
