Queen City Winery projects that it will need $50 million in total assets to meet the sales projection of $65 million.The pro forma balance sheet shows accounts payable of $8 million, accrued expenses of $2 million, long-term debt of $10 million and equity of $25 million.If Queen City decides to meet discretionary financing needs with 5 year notes payable, how much will it need to borrow?

Question

Quizplus · Accepted Answer

Discretionary financing needs are the difference between the total assets needed and the amount of funding already in place. Total assets needed can be calculated as: 
Total assets = Sales projection / Asset turnover ratio 
Given that sales projection is $65 million and total assets needed are $50 million, the asset turnover ratio can be calculated as: 
Asset turnover ratio = Sales projection / Total assets = $65 million / $50 million = 1.3 
Using the formula for asset turnover ratio, we can find the total liabilities and equity needed: 
Total liabilities and equity = Total assets - Accounts payable - Accrued expenses 
- Long-term debt - Equity = $50 million - $8 million - $2 million - $10 million - $25 million = $5 million 
Since equity is already in place, Queen City Winery will need to borrow the remaining amount of $5 million as 5 year notes payable to meet discretionary financing needs. Therefore, the correct answer is option C.

Queen City Winery Projects That It Will Need $50 Million