Question: Need for External Financing To increase production capacity by 35%, a $10 million investment. The firm wants to maintain a 40% debt-to-asset ratio, and continue

Need for External Financing

To increase production capacity by 35%, a $10 million investment. The firm wants to maintain a 40% debt-to-asset ratio, and continue to pay 45% of income as dividends. Net Income was $5 million.

A. How much External Financing is needed? Retained earnings = Net income (1 Payout ratio)

External Equity needed = Investment Retained Earnings

B. How much new Debt must they Issue? New debt required = (New investment)(Debt ratio)

C. How much new equity should they issue? Total equity required = (New investment)(1 - Debt ratio)

New external equity needed = Total equity required Retained Earnings

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