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Jobisdone [24]
3 years ago
11

Coastal Carolina Heating and Cooling Inc. has a 6-month backlog of orders for its patented solar heating system. To meet this de

mand, management plans to expand production capacity by 45% with a $20 million investment in plant and machinery. The firm wants to maintain a 35% debt level in its capital structure. It also wants to maintain its past dividend policy of distributing 55% of last year’s net income. In 2018, net income was $5 million. How much external equity must Coastal Carolina seek at the beginning of 2019 to expand capacity as desired? Assume that the firm uses only debt and common equity in its capital structure.
Business
1 answer:
liberstina [14]3 years ago
3 0

$12500000 external equity is needed

<u>Explanation:</u>

The given data:

Production capacity to be maintained : 45%, investment = $20 million, debt level to be maintained = 35%, dividend distributing = 55%, net income = $5 million

<u>INVESTMENT IN PLANT MACHINARY </u>

= $20000000

<u>NET INCOME OF YEAR 2018</u> = $5000000

<u>RETAINED EARNNING AFTER DIVIDEND </u>

=\$ 5000000-(\$ 5000000 * 55 \%)

= $2250000

<u>DEBT FINANCING </u>

=\$ 15000000 * 35 \%

= $5250000

<u>EXTERNAL EQUITY NEEDED </u>

= TOTAL INVESTMENT - DEBT FINANCING - RETAINED EARNNINGS

=\$ 20000000-\$ 5250000-\$ 2250000

= $12500000

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