Part One: External Funding Requirement

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?