Fishing Charter Inc. estimates that it invests $0.32 in assets for each dollar o
ID: 2736939 • Letter: F
Question
Fishing Charter Inc. estimates that it invests $0.32 in assets for each dollar of new sales. However, $0.05 in profits are produced by each dollar of additional sales, of which $0.02 can be reinvested in the firm. If sales rise by $600,000 next year from their current level of $6million, and the ratio of spontaneous liabilities to sales is 7 percent, what will be the firm's 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 earnings, and other sources of discretionary financing.)
The firm's need for discretionary financing is_______?
Explanation / Answer
Additional funds needed = Increase in assets - Increase in lliabilities - Increase in retained earnings
Increase in assets = 600000 x 0.32 = $192000
Increase in liabilities = 600000 x 7% = $42000
Increase in retained earnings = 600000 x 0.05 x 40% = $12000
Additional funds needed = 192000 - 42000 - 12000 = $138000
The firm's need for discretionary financing is $138000.
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