Question

Problem 4-29 Percent-ot-sales method [LO4-3] Conn Man's Shops, a national clothing chain, had sales of $370 million last year. The business has a steady net profit margin of 6 percent and a dividend payout ratio of 25 percent. The balance sheet for the end of last year is shown. 10πaL assess 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 10 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 6 percent.) 'This includes fixed assets, since the firm is at full capacity. a. Will external financing be required for the company during the coming year? What would be the need for external financing if the net profit margin went up to 7.50 percent and the dividend payout ratio was increased to 60 percent? Note: Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer in dollars, not millions, (e.9. $1,234,567). Input your answer as positive a value.

Answer 1

The question involves determining whether Conn Man's Shops will require external financing after a projected 10% increase in sales and changes in net profit margins and dividend payout ratios. The firm's balance sheet items are expected to maintain the same percent-of-sales relationships, except for common stock and retained earnings, which will change according to profits and dividend policy.

Step-by-step explanation:

The problem involves calculating whether external financing will be required for Conn Man's Shops given a projected sales increase and changes in net profit margins and dividend payout ratios. A firm's accounting profit is found by subtracting the total costs from the total sales. In a scenario where the company had sales of $1 million and costs adding up to $950,000 ($600,000 on labor, $150,000 on capital, and $200,000 on materials), the accounting profit would be $50,000. However, for Conn Man's Shops, we need to analyze the impact of a 10% increase in sales on the balance sheet and whether this leads to a need for external funding. Specifically, we must consider a situation where the net profit margin goes up to 7.50 percent and the dividend payout ratio increases to 60 percent.

If the sales increase by 10 percent to $407 million, and assuming that all other balance sheet items continue in the same proportion of sales (as per the question's premise), the increased profit needs to be calculated at the new margin, and then the dividend payment would be 60 percent of that amount. Finally, we'd examine the resulting retained earnings and determine if this internal financing suffices the additional assets required for the sales increase or if external financing is needed.

Answer 2

To determine if external financing will be required, we need to calculate the change in retained earnings based on different scenarios.

Step-by-step explanation:

To determine if external financing will be required for the company during the coming year, we need to calculate the change in external financing needed based on different scenarios.

In the current scenario, with a net profit margin of 6 percent and a dividend payout ratio of 25 percent, we can calculate the change in retained earnings as $370 million (sales) * 6% (net profit margin) * (1 - 25%) (dividend payout ratio) = $8.775 million.

If the net profit margin increased to 7.50 percent and the dividend payout ratio was increased to 60 percent, the change in retained earnings would be $370 million (sales) * 7.50% (net profit margin) * (1 - 60%) (dividend payout ratio) = -$10.425 million (negative value indicates external financing required).