Question

Conn Man’s Shops, a national clothing chain, had sales of $360 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.

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 20 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.

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

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Conn Man’s Shops, a national clothing chain, had sales of $360 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	$	23	Accounts payable	$	68
Accounts receivable		38	Accrued expenses		29
Inventory		80	Other payables		35
Plant and equipment		147	Common stock		46
			Retained earnings		110
Total assets	$	288	Total liabilities and stockholders' equity	$	288

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 20 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.

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

• Yes

• No

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 50 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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