(14–6)

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 2010, net income was $5 million. How much external equity must Northern Pacific seek at the beginning of 2011 in order to expand capacity as desired?