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    External financing requirement

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    Not sure where to begin. with a sales increase of 15% and I believe that Cambridge will still need some financing, but using the percent of sales calculation I am not seeing it.

    See below:

    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)

    Cambridge's marketing staff tells the president that in this coming year there
    will be a large increase in the demand for tweed sport coats and various shoes.
    A sales increase of 15 percent is forecast for the Prep Shop.

    Assets
    Cash . . . . . . . . . . . . . . . . . . . . . . $ 8,000
    Accounts receivable . . . . . . . . . . 20,000
    Inventory . . . . . . . . . . . . . . . . . . . 62,000
    Current assets . . . . . . . . . . . $ 90,000
    Fixed assets . . . . . . . . . . . . . . . . 100,000
    Total assets . . . . . . . . . . . . . . . . . $190,000
    Liabilities and Stockholders' Equity
    Accounts payable . . . . . . . . . . . . $ 6,000
    Accrued wages . . . . . . . . . . . . . . 2,000
    Accrued taxes . . . . . . . . . . . . . . . 4,000
    Current liabilities. . . . . . . . . . $ 12,000
    Notes payable . . . . . . . . . . . . . . . 10,000
    Long-term debt . . . . . . . . . . . . . . 20,000
    Common stock . . . . . . . . . . . . . . 80,000
    Retained earnings . . . . . . . . . . . . 68,000
    Total liabilities and
    stockholders' equity . . . . . . . . . $190,000
    Percent-of-sales
    method
    Assets
    Cash . . . . . . . . . . . . . . . . . . . . . . . . . $ 10
    Accounts receivable . . . . . . . . . . . . . 15
    Inventory . . . . . . . . . . . . . . . . . . . . . . 50
    Plant and equipment. . . . . . . . . . . . . 75
    Total assets. . . . . . . . . . . . . . . . . . . . $150
    Liabilities and Stockholders' Equity
    Accounts payable . . . . . . . . . . . . . . . $ 15
    Accrued expenses . . . . . . . . . . . . . . 5
    Other payables . . . . . . . . . . . . . . . . . 40
    Common stock . . . . . . . . . . . . . . . . . 30
    Retained earnings. . . . . . . . . . . . . . . 60
    Total liabilities and
    stockholders' equity. . . . . . . . . . . . $150

    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 12 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 to 14 percent and the dividend payout ratio was increased to 70 percent?
    Explain.

    © BrainMass Inc. brainmass.com June 3, 2020, 6:12 pm ad1c9bdddf
    https://brainmass.com/business/sales-revenue/external-financing-requirement-50901

    Solution Preview

    See below:

    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)

    Cambridge's marketing staff tells the president that in this coming year there
    will be a large increase in the demand for tweed sport coats and various shoes.
    A sales increase of 15 percent is forecast for the Prep Shop.

    Assets
    Cash . . . . . . . . . . . . . . . . . . . . . . $ 8,000
    Accounts receivable . . . . . . . . . . 20,000
    Inventory . . . . ...

    Solution Summary

    This provides the steps to compute External financing requirement

    $2.19

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