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Conn Man’s Shops, a national clothing chain, had sales of $350 million last year. The business has a steady net profit margin of 9 percent and a dividend payout ratio of 25 percent. The
The firm’s marketing staff has told the president that in the coming year there will be a large increase in the demand for overcoat and wool slacks. A sales increase of 20 percent is
All balance sheet items are expected to maintain the same percent-of-sales relationships as last year,* except for common stock and
a. Will external financing be required for the company during the coming year?
b. What would be the need for external financing if the net profit margin went up to 10.5 percent and the dividend payout ratio was increased to 60 percent? Explain.
a.
To determine: Whether the company requires external finance or not during the coming years.
Introduction:
External Finance:
It is an external/outside source through which a company raises money to accomplish its operations. It can be from the issuance of equity, debt, and loan from banks.
Answer to Problem 29P
The company does not need external finance as the requirement of new funds is negative. It indicates that the company has sufficient fund for its operations.
Explanation of Solution
The calculation of the requirement of the new funds (RNF) is as follows.
Working notes:
The calculation of the total liabilities is as follows.
The calculation of the new sales is as follows.
The calculation of the change in sales is as follows.
The calculation of the retention ratio is as follows.
b.
To determine: Whether the company requires external finance or not during the coming years when the profit margin increases to 10.5% and dividend payout ratio to 60%.
Introduction:
External Finance:
It is an external/outside source through which a company raises money to accomplish its operations. It can be from the issuance of equity, debt, and loan from banks.
Answer to Problem 29P
Due to an increase in profit margin ratio and dividend payout ratio, the company requires external finance of $10,360,000. An increase in profit margin ratio means that the funds of the company increase when there is an increase in the dividend payout ratio. The funds of the company decrease because the company needs to pay more dividends to its shareholders. The payment of a dividend company requires external finance.
Explanation of Solution
The calculation of the requirement of the new funds (RNF) is as follows.
Working notes:
The calculation of the total liabilities is as follows.
The calculation of the new sales is as follows.
The calculation of the change in sales is as follows.
The calculation of the retention ratio is as follows.
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Chapter 4 Solutions
Foundations of Financial Management
- You have just won the Strayer Lottery jackpot of $11,000,000. You will be paid in twenty-six equal annual installments beginning immediately. If you had the money now, you could invest it in an account with a quoted annual interest rate of 9% with monthly compounding of interest. Calculate the present value of the payments you will receive. Show your calculations using formulas in your paper or in an attached spreadsheet file.arrow_forwardThe approach uses a weighted average cost of capital that is unique to a particular project while determining the appropriate discount rate.arrow_forwardAn all-equity firm faces a risk-free rate of 4%, a beta of 2, and a market risk premium of 6%. What is its cost of capital? Multiple choice question. 18% 12% 14% 16%arrow_forward
- created or destroyed. uses the weighted average cost of capital to determine if value is beingarrow_forwardUnder the subjective approach for project evaluation, all proposed projects are placed into several Blank______ categories. Multiple choice question. risk cost revenue returnarrow_forwardUsing the WACC as the discount rate for future cash flows is appropriate only when the proposed investment is Blank______ the firm's existing activities. Multiple choice question. riskier than different from less risky than similar toarrow_forward
- Suppose a project has a cost of $20 million and expected cash flows of 10 million per year for two years. If the WACC is 10%, what is the NPV of this project? Multiple choice question. $17.4 million –$2.6 million $2.6 million 0 millionarrow_forwardAlpha Corporation consists of two divisions, X and Y. Division X is riskier than Division Y. If Alpha Corporation uses the firm's overall weighted average cost of capital to evaluate both divisions' projects, which division(s) will tend to be awarded greater funds for investment? Multiple choice question. Only division X Neither division Both divisions Only division Yarrow_forwardAlpha Corporation consists of two divisions, X and Y. Division X is riskier than Division Y. If Alpha Corporation uses the firm's overall weighted average cost of capital to evaluate both divisions' projects, which division(s) will tend to be awarded greater funds for investment? Multiple choice question. Only division X Neither division Both divisions Only division Yarrow_forward
- Which of the following is true of the dividends paid to common stockholders? Multiple choice question. All companies are legally required to pay dividends when they earn a net income. All companies are legally required to pay fixed dividends regardless of their financial performance. Dividends paid are not tax deductible. Unlike interest payments, dividends paid are tax-deductible at the corporate level and are tax-free at the personal level.arrow_forwardIf a firm issues no debt, its weighted average cost of capital will equal Blank______. Multiple choice question. its cost of debt half the sum of the cost of debt and equity its dividend yield its cost of equityarrow_forwardIf a firm issues no debt, its weighted average cost of capital will equal Blank______. Multiple choice question. its cost of debt half the sum of the cost of debt and equity its dividend yield its cost of equityarrow_forward
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT