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(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,
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Foundations Of Finance
- Sambonoza Enterprises projects its sales next year to be $4 million and expects to earn 5 percent of that amount after taxes. The firm is currently in the process of projecting its financing needs and has made the following assumptions (projections): 1. Current assets will equal 20 percent of sales, and fixed assets will remain at their current level of $1 million. 2. Common equity is currently $0.8 million, and the firm pays out half its after-tax earnings in dividends. 3. The firm has short-term payables and trade credit that normally equal 10 percent of sales, and it has no long- term debt outstanding. What are Sambonoza's financing requirements (i.e., total assets) and discretionary financing needs (DFN) for the coming year?arrow_forwardTobin Supplies Company expects sales next year to be $490,000. Inventory and accounts receivable will increase $75,000 to accommodate this sales level. The company has a steady profit margin of 20 percent with a 50 percent dividend payout. How much external financing will Tobin Supplies Company have to seek? Assume there is no increase in liabilities other than that which will occur with the external financing.arrow_forwardTinberg Cans expects sales next year to be $50,000,000. Inventory and accounts receivable (combined) will increase $8,000,000 to accommodate this sales level. The company has a profit margin at 6%. Its dividend payout is 30% of profit. How much external financing will the firm have to seek? Assume there is no increase in liabilities other than that which will occur with the external financing.arrow_forward
- (Financial forecasting—percent of sales) Next year’s sales for Cumberland Mfg. are expected to be $22 million. Current sales are $18 million, based on current assets of $5 million and fixed assets of $5 million. The firm’s net profit margin is 5 percent after taxes. Cumberland estimates that current assets will rise in direct proportion to the increase in sales but that its fixed assets will increase by only $150,000. Currently, Cumberland has $2 million in accounts payable (which vary directly with sales), $1 million in long-term debt (due in 10 years), and common equity (including $4 million in retained earnings) totaling $6.5 million. Cumberland plans to pay $750,000 in common stock dividends next year. Required: What are Cumberland’s total financing needs (that is, total assets) for the coming year? Given the firm’s projections and dividend payment plans, what are its discretionary financing needs? Based on your projections, and assuming that the $150,000 expansion in fixed assets…arrow_forward(Financial forecasting percent of sales) Tulley Appliances, Inc. projects next year's sales to be $19.9 million. Current sales are at $15.3 million, based on current assets of $5.1 million and fixed assets of $4.9 million. The firm's net profit margin is 5.3 percent after taxes. Tulley forecasts that current assets will rise in direct proportion to the increase in sales, but fixed assets will increase by only $110,000. Currently, Tulley has $1.6 million in accounts payable (which vary directly with sales), $1.9 million in long-term debt (due in 10 years), and common equity (including $3.8 million in retained earnings) totaling $6.3 million. Tulley plans to pay $501,000 in common stock dividends next year. a. What are Tulley's total financing needs (that is, total assets) for the coming year? b. Given the firm's projections and dividend payment plans, what are its discretionary financing needs? c. Based on your projections, and assuming that the $110,000 expansion in fixed assets will…arrow_forwardGalehouse Gas Station Inc. expects sales to increase from$1,550,000 to $1750,000 next year. Galehouse believes that net assets ( Assets - Liabilities) will represent 50 mpercent of sales. His firm has an 8 percent return on sales and pays 45 percent of profits out as dividens. A. What effect will this growth have on funds? B. If the dividen payout is only 25 percent, what effect will this growth have on the funds?arrow_forward
- Antivirus Inc. expects its sales next year to be $3,100,000. Inventory and accounts receivable will increase by $540,000 to accommodate this sales level. The company has a steady profit margin of 15 percent with a 35 percent dividend payout. How much external financing will the firm have to seek? Assume there is no increase in liabilities other than that which will occur with the external financing.arrow_forwardMagnum, Inc., projects next year's sales to be $20 million. Current sales are at $15 million, based on current assets of $7 million and fixed assets of $8 million. The firm's net profit margin is 5 percent after taxes. Magnum forecasts that current assets will rise in direct proportion to the increase in sales but that fixed assets will increase by only $150,000. Currently, Magnum has $1.5 million in accounts payable (which vary directly with sales), $7 million in long-term debt (due in 10 years), and common equity (including $4 million in retained earnings) totaling $6.5 million. Magnum plans to pay $500,000 in common stock dividends next year. What are Magnum's total financing needs (that is, total assets) for the coming year?arrow_forwardBedrock Company has $70 million in debt and $30 million in equity. The debt matures in1 year and has a 10% interest rate, so the company is promising to pay back $77 million toits debtholders 1 year from now.The company is considering two possible investments, each of which will require an up-front cost of $100 million. Each investment will last for 1 year, and the payoff from each investment depends on the strength of the overall economy. There is a 50% chance that theeconomy will be weak and a 50% chance it will be strong. Here are the expected payoffs (all dollars are in millions) from the two investments: Note that the two projects have the same expected payoff, but Project H has higher risk. Thedebtholders always get paid first and the stockholders receive any money that is availableafter the debtholders have been paid.Assume that if the company doesn’t have enough funds to pay off its debtholders 1 yearfrom now, then Bedrock will declare bankruptcy. If bankruptcy is declared,…arrow_forward
- Kohwe Corporation plans to finance a new investment with leverage. Kohwe Corporation plans to borrow $49.3 million to finance the new investment. The firm will pay interest only on this loan each year, and it will maintain an outstanding balance of $49.3 million on the loan. After making the investment, Kohwe expects to earn free cash flows of $10.7 million each year. However, due to reduced sales and other financial distress costs, Kohwe's expected free cash flows will decline to $9.7 million per year. Kohwe currently has 4.6 million shares outstanding, and it has no other assets or opportunities. Assume that the appropriate discount rate for Kohwe's future free cash flows is 7.9% and Kohwe's corporate tax rate is 40%. What is Kohwe's share price today given the financial distress costs of leverage? The price per share is $23.01 per share. (Round to the nearest cent.) Carrow_forwardTime to grow: Zephyr Sales Company has currently reported sales of $1.125 million. If the company expects its sales to grow 6.5 percent annually, how long will it be before the company can double its sales? Use a financial calculator to solve this problem.arrow_forwardMeyer & Co. expects its EBIT to be $97,000 every year forever. The firm can borrow at 8 percent. The company currently has no debt, and its cost of equity is 13 percent. The tax rate is24 percent. What is the WACC? What are the implications of the firm’s decision to borrow? Please work on excel and show formulasarrow_forward
- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT