BuyFindarrow_forward

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

Solutions

Chapter
Section
BuyFindarrow_forward

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

EXTERNAL EQUITY FINANCING Coastal Carolina 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 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.

Summary Introduction

To Determine: The amount of external equity must Company CC at the beginning of 2019.

Introduction: Equity financing alludes to raising assets for business purpose by exchanging complete or restricted ownership for organization's equity for cash or different assets. In financing companies, this is most ordinarily done by selling either common stock, preferred stock, or a mix of common stock and preferred stock.

Explanation

Determine the retained earnings

RetainedEarnings=[NetIncome×(1PayoutRatio)]=[$5,000,000×(155%)]=[$5,000,000×45%]=$2,250,000

Therefore the retained earnings are $2,250,000.

Determine the amount of external equity

AmountofExternalEquit

Still sussing out bartleby?

Check out a sample textbook solution.

See a sample solution

The Solution to Your Study Problems

Bartleby provides explanations to thousands of textbook problems written by our experts, many with advanced degrees!

Get Started

Additional Business Solutions

Find more solutions based on key concepts

Show solutions add

What is job analysis?

Foundations of Business (MindTap Course List)

PV OF A CASH FLOW STREAM A rookie quarterback is negotiating his first NFL contract. His opportunity cost is 10...

Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)