(Forecasting discretionary financing needs)
Fishing Charter, Inc. Estimates that it invests 30 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 can be reinvested in the firm. If sales rise from their current level of $5 million by $500,000 next year, and the ratio of spontaneous liabilities to sales is 0.15, what will be the firm麓s need for discretionary financing? (Hint: in this situation you do not know what the firm麓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 earnings, and other sources of discretionary financing.
Can anybody pls help me with this?
I think this ought to be correct.
Change in spontaneuos liability = 0.15 * (500000)
=75,000
Net Profit earned = 0.04 * 500000 = 20,000 (1 cent is reinvested)
Increase in asset = 0.3 * 500,000 = 150,000
Intial liability = 0.15 * 5,000,000 = 750,000
Total liability = 825,000
But Liability - Asset increase = Profit + Finance
Hence Finance = $655,000
