Videos
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.
Want to see more full solutions like this?
Chapter 4 Solutions
Foundations of Financial Management
- Suppose that Gyp Sum Industries currently has the balance sheet shown. below, and that sales for the year just ended were $9.5 million. The firm also has a profit margin of 25 percent and a retention ratio of 30 percent, and expects sales of $7.5 million next year.arrow_forwardRicardo Entertainment recently reported the following income statement:Sales 12,000,000Cost of goods sold 7,500,000EBIT 4,500,000Interest 1,500,000EBT 3,000,000Taxes (40%) 1,200,000Net income 1,800,000The company’s CFO, Fred Mertz, wants to see a 25 percent increase in net income over the next year.In other words, his target for next year’s net income is $2,250,000. Mertz has made the followingobservations: Ricardo’s operating margin (EBIT/Sales) was 37.5 percent this past year. Mertz expects thatnext year this margin will increase to 40 percent. Ricardo’s interest expense is expected to remain constant. Ricardo’s tax rate is expected to remain at 40 percent.On the basis of these numbers, what is the percentage increase in sales that Ricardo needs in order tomeet Mertz’s target for net income?arrow_forwardConsider the following scenario: Green Caterpillar Garden Supplies Inc.’s income statement reports data for its first year of operation. The firm’s CEO would like sales to increase by 25% next year. 1. Green Caterpillar is able to achieve this level of increased sales, but its interest costs increase from 10% to 15% of earnings before interest and taxes (EBIT). 2. The company’s operating costs (excluding depreciation and amortization) remain at 60% of net sales, and its depreciation and amortization expenses remain constant from year to year. 3. The company’s tax rate remains constant at 25% of its pre-tax income or earnings before taxes (EBT). 4. In Year 2, Green Caterpillar expects to pay $100,000 and $1,759,500 of preferred and common stock dividends, respectively. A. Complete the Year 2 income statement data for Green Caterpillar, then answer the questions that follow. Be sure to round each dollar value to the nearest whole dollar. Green Caterpillar…arrow_forward
- Consider the following scenario: Green Caterpillar Garden Supplies Inc.'s Income statement reports data for its first year of operation. The firm's CEO would like sales to increase by 25% next year. 1. Green Caterpillar is able to achieve this level of increased sales, but its interest costs increase from 10% to 15% of earnings before Interest and taxes (EBIT). 2. The company's operating costs (excluding depreciation and amortization) remain at 60% of net sales, and its depreciation and amortization expenses remain constant from year to year. 3. The company's tax rate remains constant at 25% of its pre-tax income or earnings before taxes (EBT). 4. In Year 2, Green Caterpillar expects to pay $100,000 and $1,759,500 of preferred and common stock dividends, respectively. Complete the Year 2 Income statement data for Green Caterpillar, then answer the questions that follow. Be sure to round each dollar value to the nearest whole dollar. Net sales Less: Operating costs, except depreciation…arrow_forwardConsider the following scenario: Cute Camel Woodcraft Company’s income statement reports data for its first year of operation. The firm’s CEO would like sales to increase by 25% next year. 1. Cute Camel is able to achieve this level of increased sales, but its interest costs increase from 10% to 15% of earnings before interest and taxes (EBIT). 2. The company’s operating costs (excluding depreciation and amortization) remain at 65% of net sales, and its depreciation and amortization expenses remain constant from year to year. 3. The company’s tax rate remains constant at 25% of its pre-tax income or earnings before taxes (EBT). 4. In Year 2, Cute Camel expects to pay $100,000 and $1,773,844 of preferred and common stock dividends, respectively. Complete the Year 2 income statement data for Cute Camel, then answer the questions that follow. Be sure to round each dollar value to the nearest whole dollar. Need help with Year 2 values and questions at bottomarrow_forwardKerwin Motors is a chain of car dealerships. Sales in the fourth quarter of last year were $4,500,000. Suppose management projects that its current year's quarterly sales will increase by 2% in quarter 1, by another 5% in quarter 2, by another 7% in quarter 3, and by another 6% in quarter 4. Management expects cost of goods sold to be 45% of revenues every quarter, while operating expenses should be 30% of revenues during each of the first two quarters, 20% of revenues during the third quarter, and 35% during the fourth quarter. Requirement Prepare a budgeted income statement for each of the four quarters and for the entire year. Prepare the first portion of the budgeted income statement through gross profit, then complete the statement. (Round the amounts to the nearest whole dollar.) Kerwin Motors Budgeted Income Statement For the Upcoming Year Sales Less: Cost of goods sold Gross profit Quarter 1 Quarter 2 Quarter 3 Quarter 4 Yeararrow_forward
- Anderson Motors is a chain of car dealerships. Sales in the fourth quarter of last year were $4,400,000. Suppose management projects that its current year's quarterly sales will increase by 6% in quarter 1, by another 3% in quarter 2, by another 7% in quarter 3, and by another 5% in quarter 4. Management expects cost of goods sold to be 40% of revenues every quarter, while operating expenses should be 20% of revenues during each of the first two quarters, 25% of revenues during the third quarter, and 35% during the fourth quarter. Requirement Prepare a budgeted income statement for each of the four quarters and for the entire year. Prepare the first portion of the budgeted income statement through gross profit, then complete the statement. (Round the amounts to the nearest whole dollar.) Anderson Motors Budgeted Income Statement For the Upcoming Year Quarter 1 Quarter 2 Quarter 3 Quarter 4 Year Sales Less: Cost of goods sold Gross profitarrow_forwardConsider the following scenario: Blue Hamster Manufacturing Inc.'s income statement reports data for its first year of operation. The firm's CEO would like sales to increase by 25% next year. 1. Blue Hamster is able to achieve this level of increased sales, but its interest costs increase from 10% to 15% of earnings before interest and taxes (EBIT). 2. The company's operating costs (excluding depreciation and amortization) remain at 65% of net sales, and its depreciation and amortization expenses remain constant from year to year. 3. The company's tax rate remains constant at 25% of its pre-tax income or earnings before taxes (EBT). 4. In Year 2, Blue Hamster expects to pay $200,000 and $2,280,656 of preferred and common stock dividends, respectively. Complete the Year 2 income statement data for Blue Hamster, then answer the questions that follow. Be sure to round each dollar value to the nearest whole dollar. Blue Hamster Manufacturing Inc. Income Statement for Year Ending December…arrow_forwardCold Goose Metal Works Inc.’s income statement reports data for its first year of operation. The firm’s CEO would like sales to increase by 25% next year. 1. Cold Goose is able to achieve this level of increased sales, but its interest costs increase from 10% to 15% of earnings before interest and taxes (EBIT). 2. The company’s operating costs (excluding depreciation and amortization) remain at 70% of net sales, and its depreciation and amortization expenses remain constant from year to year. 3. The company’s tax rate remains constant at 25% of its pre-tax income or earnings before taxes (EBT). 4. In Year 2, Cold Goose expects to pay $200,000 and $1,922,063 of preferred and common stock dividends, respectively. Complete the Year 2 income statement data for Cold Goose, then answer the questions that follow. Be sure to round each dollar value to the nearest whole dollar. Cold Goose Metal Works Inc. Income Statement for Year Ending December 31…arrow_forward
- Cyber Security Systems had sales of 4,600 units at $65 per unit last year. The marketing manager projects a 30 percent increase in unit volume sales this year with a 40 percent price increase. Returned merchandise will represent 5 percent of total sales. What is your net dollar sales projection for this year?arrow_forwardHiTech Electronics manufactures two new products, Tablets and Touch Screen Remotes, and sells them nationally to wholesalers and retailers. The HiTech management is very pleased with the company’s performance for the current fiscal year. Projected sales through December 31, 2022, indicate that 70,000 Tablets and 140,000 Remotes will be sold this year. The projected earnings statement, which appears below, shows that HiTech will exceed its earnings goal of 9 percent on sales after taxes. The Tablet business has been fairly stable for the last few years, and the company does not intend to change the Tablet price. However, the competition among manufacturers of Touch Screen Remotes has been increasing. HiTech’s Remotes have been very popular with consumers.In order to sustain this interest in their Remotes and to meet the price reductions expected from competitors, management has decided to reduce the wholesale price of its calculator from $22.50 to $20.00 per unit effective January 1,…arrow_forwardCold Goose Metal Works Inc.’s income statement reports data for its first year of operation. The firm’s CEO would like sales to increase by 25% next year. 1. Cold Goose is able to achieve this level of increased sales, but its interest costs increase from 10% to 15% of earnings before interest and taxes (EBIT). 2. The company’s operating costs (excluding depreciation and amortization) remain at 70.00% of net sales, and its depreciation and amortization expenses remain constant from year to year. 3. The company’s tax rate remains constant at 40% of its pre-tax income or earnings before taxes (EBT). 4. In Year 2, Cold Goose expects to pay $100,000 and $1,195,950 of preferred and common stock dividends, respectively.arrow_forward
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT