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Question: Prep, Shoes a national shoe store chain, had sales of $200 million last year. The business has net profit after tax of $20 million and a...

Question:Prep, Shoes a national shoe store chain, had sales of $200 million last year. The business has net profit after tax of $20 million and a dividend payout ratio of 50 percent. The balance sheet for the end of last year is shown below:

Balance Sheet

December 31, 2015 ($ millions)

Assets                                                                                                                 Liabilities and shareholders' Equity

Cash                                    $7                                                                          Accounts Payable                          $55        

Accounts receivable     28                                                                                 Accrued Expenses                   15

Inventory                          60                                                                    Other payables                                    20

Plant and equipment   115                                                                        Common Stock                               30          

Total Assets                     $210                                                                      Retained earnings                         90

                                                                                                                               Total Liabilities and Equity        $210


Harvard's anticipates a sales increase of 30 percent next year due to new products.

All balance sheet items are expected to maintain the same percent of scale relationships as last year, expect for plant and equipment, common stock and retained earnings. No change in the common shares outstanding is scheduled, and retained earnings will change as directed by the profits and divided policy of the firm. Using the percent of sales approach,

a.      What will be increase in retained earnings next year?

b.     Will external financing be required for the prep Shop during the coming year? Show all calculations.

If days in A/R Decrease by 5 days what effect will this have on financing needs

Top Answer

a. New Sales = Old sales * (1 + Forecast Increase)    New Sales = $200m * (1 + 30%)    New Sales = $200m + 60m    New... View the full answer

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