Question
Lytle Trucking projects a $3.2 million EBIT next year. The firm's marginal tax rate is 39%, and it currently has $8 million in long-term debt
Lytle Trucking projects a $3.2 million EBIT next year. The firm's marginal tax rate is 39%, and it currently has $8 million in long-term debt on which it pays an average rate of 10%. Management is projecting a requirement for additional assets costing $1.5 million and no change in current liabilities. They plan to maintain a 30% dividend payout ratio. Any additional borrowing required to fund next year's asset growth will carry a 7% coupon rate. Lytle does not plan on issuing additional stock next year. Using the EFR concept rather than the EFR equation,develop an algebraic formula of your own to compute the additional debt needed to support an asset growth of $1.5 million. Round you answer to the nearest dollar. (Hint: Start with the idea that additional debt = new assets internally generated funds. Then write an algebraic expression for internally generated funds based on the income statement from EBIT to net income and the dividend payout ratio. )
$
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started