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arvard Prep Shops, a national clothing chain, had sales of $350 million last year. The business has a steady net profit margin of 20 percent

arvard 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 30 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 $4 Accounts payable $45
Account receivable 12 Accrued expenses 11
Inventory 60 Other payables 28
Common stock 70
Plant and equipment 190 Retained earnings 112
Total assets $266 Total liabilities and equity $266

Harvards anticipates a large increase in the demand for tweed sport coats and deck shoes. A sales increase of 30 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 65 percent? (Enter the answer in millions. Round the final answer to 2 decimal places.)

Required new funds $ million

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