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    Northern Pacific's External Equity

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    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 percent with a $10 million investment in plant and machinery. The firm wants to maintain a 40 percent debt-to-total-assets ratio in its capital structure; it also wants to maintain its past dividend policy of distributing 45 percent of last year's net income. In 2004, net income was $5 million. How much external equity must Northern Pacific seek at the beginning of 2005 to expand capacity as desired?

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    Solution Preview

    Capital budget= $10 million

    Requirement to be met from:
    Optimal capital structure
    60% equity= $6 million
    40% debt= $4 ...

    Solution Summary

    The external equity required for expanding capacity is calculated in an attached Excel document.