Conn Mana's Shops Inc., a national clothing chain, had sales of $350 million last year. The business has a steady net profit margin of 9 percent and a dividend payout ratio of 25 percent. The balance sheet for the end of last year is shown next.

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 9 percent.)
a. Will external financing be required for the company during the coming year?
b. What would be the need for external financing if the net profit margin went up to 10.5 percent and the dividend payout ratio was increased to 60 percent?Explain.

Transcribed Image Text:

Balance Sheet End of Year (in S millions) Liabilities and Stockholders' Equity Assets Cash Accounts receivable Inventory Plant and equipment S25 Accounts payabLe. 40 82 133 Accrued expenses Other payables Common sto Retained earnings Total liabilities and S 64 31 45 50 90 Total assets stockholders' equity $280