Reference no: EM132571254

Conn Man's Shops, Inc., a national clothing chain, had sales of $300 million last year. The business has a steady net profit margin of 8 percent and a dividend payout ratio of 25 percent. The balance sheet for the end of last year is shown below.

Balance Sheet End of Year (in $ millions)

Assets                                                               Liabilities and Stockholders' Equity

Cash . . . . . . . . . . . . . . . . . . . . . $ 20 Accounts payable..................... $ 70

Accounts receivable . . . . . . . . . 25 Accrued expenses....................... 20

Inventory . . . . . . . . . . . . . . . . . . 75 Other payables............................ 30

Plant and equipment . . . . . .. 120 Common stock........................... 40

Retained earnings....................... 80

Total liabilities and

Total assets . . . . . . . . . . . . . . . $240 stockholders' equity.............. $240

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 15 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 8%)

Question a. Will external financing be required for the company during the coming year?

Question b. What would be the need for external financing if the net profit margin went up to 9.5% and the dividend payout ratio was increased to 50%? Explain.