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
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 |