Problem:
Andrews Corporation plans a $10 million expansion. The firm wants to maintain a 45 percent debt-to-total-assets ratio in its capital structure. It also wants to maintain its past dividend policy of distributing 30 percent of last year's net income. Last year, net income was $4 million.
Required:
Question 1: Calculate the amount of external equity needed. (I have calculated this to be 2.7 million)
Question 2: If the company changed to a residual dividend policy, how much external equity will it need?
Question 3: Is the company likely to change to a residual policy? Why or why not?
Note: Please show how to work it out.