Financial Management: 18-6 Northern Pacific Heating and Cooling Inc. has a 6-month backlog

Financial Management

18-6 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 40% with a $10 million investment in plant and machinery. The firm wants to maintain a 40% debt-to-total-assets ratio in its capital structure; it also wants to maintain its past dividend policy of distributing 45% of last year’s net income. In 2007, net income was $5 million.
How much external equity must Northern Pacific seek at the beginning of 2008 to expand capacity as desired?
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