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Conn Man’s Shops, 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 overcoat and wool slacks. A sales increase of 20 percent is
All balance sheet items are expected to maintain the same percent-of-sales relationships as last year,* except for common stock and
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.
a.
To determine: Whether the company requires external finance or not during the coming years.
Introduction:
External Finance:
It is an external/outside source through which a company raises money to accomplish its operations. It can be from the issuance of equity, debt, and loan from banks.
Answer to Problem 29P
The company does not need external finance as the requirement of new funds is negative. It indicates that the company has sufficient fund for its operations.
Explanation of Solution
The calculation of the requirement of the new funds (RNF) is as follows.
Working notes:
The calculation of the total liabilities is as follows.
The calculation of the new sales is as follows.
The calculation of the change in sales is as follows.
The calculation of the retention ratio is as follows.
b.
To determine: Whether the company requires external finance or not during the coming years when the profit margin increases to 10.5% and dividend payout ratio to 60%.
Introduction:
External Finance:
It is an external/outside source through which a company raises money to accomplish its operations. It can be from the issuance of equity, debt, and loan from banks.
Answer to Problem 29P
Due to an increase in profit margin ratio and dividend payout ratio, the company requires external finance of $10,360,000. An increase in profit margin ratio means that the funds of the company increase when there is an increase in the dividend payout ratio. The funds of the company decrease because the company needs to pay more dividends to its shareholders. The payment of a dividend company requires external finance.
Explanation of Solution
The calculation of the requirement of the new funds (RNF) is as follows.
Working notes:
The calculation of the total liabilities is as follows.
The calculation of the new sales is as follows.
The calculation of the change in sales is as follows.
The calculation of the retention ratio is as follows.
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Chapter 4 Solutions
Foundations Of Financial Management
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