Chapter 14, Problem 9SP

(Financial forecasting—discretionary financing needs) Fishing Charter, Inc. estimates that it invests $0.30 in assets for each dollar of new sales. However, $0.05 in profits are produced by each dollar of additional sales, of which $0.01 can be reinvested in the firm. If sales rise by $500,000 next year from their current level of $5 million, and the ratio of spontaneous liabilities to sales is 15 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.)