Related to Checkpoint 17.1) (Discretionary financing needs) Fishing Charter, Inc
ID: 2819467 • Letter: R
Question
Related to Checkpoint 17.1) (Discretionary financing needs) Fishing Charter, Inc, estimates that it invests 28 cents in assets for each dollar of new sales. However, 5 cents in profits are produced by each dollar of additional sales, of which 1 cent(s) can be reinvested in the firm. If sales rise by $458,000 next year from their current level of $5.37 million, and the ratio of spontaneous liabilities to sales is 0.14, what will be the firms need for discretionary financing? (Hint In this situation you do not know what the firm's existing level of assets is, nor do you know how those assets have been financed. Thus, you must estimate the change in financing needs and match this change with the expected changes in spontaneous liabilities, retained eamings, and other sources of discretionary financing.) The discretionary financing needs will be s(Round to the nearest dolar:)Explanation / Answer
External or discretionary financing needed = [ (Assets / Sales) x Change in Sales ] - [ (Spontaneous liabilities / Sales) x Change in sales ] - [ Profit margin x Forcasted sales x Retention ratio ]
In the current question, we are given the following information -
Assets / Sales = 28 cents or 0.28
Profit margin = 5 cents or 0.05
Retention ratio = 1 cent or 0.01
Change in sales = $458,000
Forcasted sales = $5,370,000 + $458,000 = $5,828,000
Spontaneous liabilities / Sales = 0.14
Discretionary financing needed = [ 0.28 x $458,000 ] - [ 0.14 x $458,000 ] - [ 0.05 x $5,828,000 x 0.01 ]
or, Discretionary financing needed = $61,206