"4-26. Solution:Jordan Aluminum SuppliesEarnings after taxes $30,000 Profit margin = = =10% Sales $300,000 Dividends $18,000 Payout ratio = = =60% Earnings 30,000 Change in Sales = 20% × $300,000 = $60,000Spontaneous Assets = Current Asserts = Cash + Acc. Rec. +InventorySpontaneous Liabilities = Acc. Payable + Accr. Wages + Accr.TaxesAL RNF= ?S- ?S-- P S 1 D ( ) ( ) ( ) 2 SS $90,000 $12,000 = $60,000- $60,000-.10 $360,000 1-.60 ( ) ( ) ( ) ( ) $300,000 $300,000 =.30 $60,000-- .04 $60,000 .10 $360,000 .4 ( ) ( ) ( ) ( ) =$18,000-- $2,400 $14,400 RNF = $1,200 The firm needs $1,200 in external funds.S4-38 27. Cambridge Prep Shops, a national clothing chain, had sales of $200 million last year. The business has a steady net profit margin of 12 percent and a dividend payout ratio of 40 percent. The balance sheet for the end of last year is shown below.Balance Sheet End of Year(in $ millions)Assets Liabilities and Stockholders’ EquityCash..................................... $ 10 Accounts payable ................... $ 15Accounts receivable ............ 15 Accrued expenses................... 5Inventory ............................. 50 Other payables ....................... 40Plant and equipment ............ 75 Common stock ....................... 30.Retained earnings ................... 60 Total liabilities and Total assets .......................... $150stockholders’ equity ............ $150Cambridge’s marketing staff tells the president that in this coming year there will be alarge increase in the demand for tweed sport coats and various shoes. A sales increase of 15 percent is forecast for the Prep Shop.All balance sheet items are expected to maintain the same percent-of-sales relationshipsas last year*, except for common stock and retained earnings. No change is scheduled inthe number of common stock shares outstanding, and retained earnings will change asdictated by the profits and dividend policy of the firm. (Remember the net profit margin is12 percent.) a. Will external financing be required for the Prep Shop during the coming year? b. What would be the need for external financing if the net profit margin went up to14 percent and the dividend payout ratio was increased to 70 percent? Explain.* This included fixed assets as the firm is at full capacity.S4-39 4-27. Solution:Cambridge Prep ShopsAL a. Required New Funds = ?S- ?S - PS 1- D( ) ( ) ( ) 2 SS ?× S = 15% $200,000,000- $30,000,000150 60 RNF = $30,000,000 - $30,000,000 ( ) ( ) 200 200 -- .12 $230,000,000 1 .4 ( ) ( )=.75 $30,000,000 -.30 $30,000,000( ) ( ) -.12 $230,000,000 .6 ( ) ( ) =$22,500,000-$9,000,000- $16,560,000 RNF = $3,060,000( ) A negative figure for required new funds indicates that anexcess of funds ($3.06 mil.) is available for new investment.No external funds are needed.S4-40 4-27. (Continued)b.RNF = $22,500,000 - $9,000,000 - .14($230,000,000) ×- 1 .7( ) = $22,500,000-- $9,000,000 $9,660,000$3,840,000 external funds requiredThe net profit margin increased slightly, from 12% to 14%,which decreases the need for external funding. The dividendpayout ratio increased tremendously, however, from 40% to70%, necessitating more external financing. The effect of thedividend policy change overpowered the effect of the netprofit margin change.S4-41 COMPREHENSIVE PROBLEMComprehensive Problem 1.The Landis Corporation had 2008 sales of $100 million. The balance sheet items that varydirectly with sales and the profit margin are as follows:PercentCash....................................................................... 5%Accounts receivable .............................................. 15Inventory ............................................................... 25Net fixed assets ..................................................... 40Accounts payable .................................................. 15Accruals ................................................................ 10Profit margin after taxes........................................ 6%The dividend payout rate is 50 percent of earnings, and the balance in retained earnings atthe end of 2009 was $33 million. Common stock and the company’s long-term bonds areconstant at $10 million and $5 million, respectively. Notes payable are currently $12 million.a. How much additional external capital will be required for next year if sales increase 15 percent? (Assume that the company is already operating at full capacity.)b. What will happen to external fund requirements if Landis Corporation reduces the payoutratio, grows at a slower rate, or suffers a decline in its profit margin? Discuss each of theseseparately.c. Prepare a pro forma balance sheet for 2009 assuming that any external funds being acquiredwill be in the form of notes payable. Disregard the information in part b in answering thisquestion (that is, use the original information and part a in constructing your pro formabalance sheet).S4-42 "