Question

Harvard Prep Shops, a national clothing chain, had sales of $350 million last year. The business has a steady net profit margin of 20 percent and a dividend payout ratio of 40 percent. The balance sheet for the end of last year is shown below:

Balance Sheet December 31, 20XX ($ millions)
Assets		Liabilities and Shareholders' Equity
Cash	$10	Accounts payable	$45
Account receivable	22	Accrued expenses	14
Inventory	71	Other payables	18
		Common stock	50
Plant and equipment	170	Retained earnings	146
Total assets	$273	Total liabilities and equity	$273

Harvard’s anticipates a large increase in the demand for tweed sport coats and deck shoes. A sales increase of 20 percent is forecast.

All balance sheet items are expected to maintain the same percent-of-sales relationships as last year, except for common stock and retained earnings. No change in the number of common shares outstanding is scheduled, and retained earnings will change as dictated by the profits and dividend policy of the firm.

a. Will external financing be required for the Prep Shop during the coming year?

• Yes

• No

b. What would the need for external financing be if the net profit margin went up to 25 percent and the dividend payout ratio was increased to 75 percent? (Enter the answer in millions. Round the final answer to 2 decimal places.)

Required new funds           $  million

Answer 1

a)

b)