Harvard Prep Shops, a national clothing chain, had sales of $$300$ million last year.

The business has a steady net profit margin of $15$ percent and a dividend payout

ratio of $30$ percent. The balance sheet for the end of last year is shown below:

Balance Sheet

December $31,2015($$ millions$)$

Assets

Liabilities and Shareholders$$ Equity

Cash $.......................$ $ $7$ Accounts payable. $.............$ $ $55$

Accounts receivable. $.........$

$28$ Accrued expenses $.............$

Inventory. $...................$

Plant and equipment $.........$

$60$ Other payables $................$

$115$ Common stock $................$

Retained earnings. $...........$

$15$

$20$

$30$

$90$

Total assets. $.................$ $$210$ Total liabilities and equity. $.......$ $$210$

Harvard$$s anticipates a large increase in the demand for tweed sport coats and deck

shoes. A sales increase of $25$ 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?

b$.$ What would the need for external financing be if the net profit margin went up to

$20$ percent and the dividend payout ratio was increased to $65$ percent? Explain