# How to Calculate External Equity

Companies receive equity from investors who buy company stock. The amount of equity a company currently has is proportional to the size of the dividend that it pays to investors and to the number of shares that it has issued to investors. If the company has a target level of equity, the external equity that it needs is the difference between this target and its current equity level. If the company needs a lot of external equity, it may issue new stock.

## Step 1

Divide the dividends that you receive from a company by the company's net income. For example, if the company that has made a net profit of \$20,000 pays you \$100 in dividends after you invested \$5,000, divide \$100 by \$20,000 to get 0.005.

## Step 2

Divide the equity that you contributed to the company by this ratio. With this example, divide \$5,000 by 0.0005 to get \$1 million in total equity.

## Step 3

Subtract the company's current total equity from its target equity level. For example, if the company seeks \$1.1 million in equity, subtract \$1 million from \$1.1 million to get \$100,000. This is the amount of external equity that the company needs.