Problem 15-5 External equity financing Northern Pacific Heating and Cooling Inc.
ID: 2710020 • Letter: P
Question
Problem 15-5
External equity financing
Northern Pacific Heating and Cooling Inc. has a 6-month backlog of orders for its patented solar heating system. To meet this demand, management plans to expand production capacity by 50% with a $5 million investment in plant and machinery. The firm wants to maintain a 45% debt-to-total-assets ratio in its capital structure. It also wants to maintain its past dividend policy of distributing 60% of last year's net income. In 2012, net income was $5 million. How much external equity must Northern Pacific seek at the beginning of 2013 to expand capacity as desired? Assume the firm uses only debt and common equity in its capital structure. Write out your answer completely. For example, 25 million should be entered as 25,000,000. Round your answer to the nearest cent.
Explanation / Answer
Lets find out the companys current equity level
given investment $5million
Dividened =0.6 of net income 5,000,000 that is $3,000,000
Net income for the year 2012 is $5million
therefore $3,000,000/$5,000,000=0.6
current equity level=investment amount/0,6=$5,000,000/0.6=$833,3333.33
External equity required=$833,3333.33*0.5=$4166666.5
Answer $4166666.5