EXTERNAL EQUITY FINANCING Northern Pacific Heating and Cooling Inc. has a 6-month backlog of orders…

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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 2008, net income was $5 million. How much external equity must Northern Pacific seek at the beginning of 2009 to expand capacity as desired? Assume that the firm uses only debt and common equity in its capital structure.

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