Question

Conn Man’s Shops, a national clothing chain, had sales of $410 million last year. The business has a steady net profit margin of 7 percent and a dividend payout ratio of 20 percent. The balance sheet for the end of last year is shown.

Balance Sheet End of Year (in $ millions)
Assets			Liabilities and Stockholders' Equity
Cash	$	41	Accounts payable	$	53
Accounts receivable		46	Accrued expenses		39
Inventory		92	Other payables		31
Plant and equipment		190	Common stock		82
			Retained earnings		164
Total assets	$	369	Total liabilities and stockholders' equity	$	369

The firm's marketing staff has told the president that in the coming year there will be a large increase in the demand for overcoats and wool slacks. A sales increase of 10 percent is forecast for the company.

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 is scheduled in the number of common stock shares outstanding, and retained earnings will change as dictated by the profits and dividend policy of the firm. (Remember, the net profit margin is 7 percent.)

*This includes fixed assets, since the firm is at full capacity.

b. What would be the need for external financing if the net profit margin went up to 8.50 percent and the dividend payout ratio was increased to 60 percent? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer in dollars, not millions, (e.g., $1,234,567).)

Answer 1

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