Question

Harvard Prep Shops, a national clothing chain, had sales of $300 million last year. The business has a steady net profit margin of 20 percent and a dividend payout ratio of 25 percent. The balance sheet for the end of last year is shown below: Assets Cash Account receivable Inventory Balance Sheet December 31, 20xx ($ millions) Liabilities and Shareholders' Equity $10 Accounts payable 40 Accrued expenses Other payables Common stock 150 Retained earnings $12 10 11 67 30 Plant and equipment 204 Total assets $267 Total liabilities and equity $267 Harvard's anticipates a large increase in the demand for tweed sport coats and deck shoes. A sales increase of 20 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?

Answer 1

Answer:

Increase in sale = $300 million sales*20% = $60 million

Revised Sales = $300 million sales + $60 million = $360 million

Requirement of new funds = [ Asset / sales *Change in sales ] - [ Laibilities / sales *Change in sales ] - Revised Sales * net profit margin ration * Retention ration

= [267/300*60] - [204/300*60] - 0.20*360*(1- 0.25)

= [0.89*60] - [0.68*60] - 0.20*360*0.75

= 53.4- 40.8 - 54

= -41.4

Negatinve figure of requirement $ -41.4 millions of new funds which indicates that there is no need of external financing.