Harrison Electronics, Inc. operates a chain of electrical lighting and fixture d

Question

Harrison Electronics, Inc. operates a chain of electrical lighting and fixture distribution centers throughout northern Arizona. The firm is anticipating expansion of its sales in the coming year as a result of recent population growth trends. The firm’s financial analyst has prepared pro forma balance sheets that reflect three different rates of growth in firm sales for the coming year and the corresponding non-discretionary sources of financing the firm expects to have available, as follows:

a. What are the firm’s discretionary financing needs under each of the three growth scenarios?

b. What potential sources of financing are there for Harrison to fulfill its needs for discretionary financing?

Explanation / Answer

a. •The difference between total assets and total liabilities and owner’s equity is referred to as discretionary financing needed (DFN). In other words, this is the amount of discretionary financing that the firm thinks it will need to raise in the next year. The firm will find that it is forecasting a higher level of assets than liabilities and equity. In this case, the managers would need to arrange for more liabilities and/or equity to finance the level of assets needed to support the volume of sales expected. •This is referred to as a deficit of discretionary funds. If the forecast shows that there will be a higher level of liabilities and equity than assets, the firm is said to have a surplus of discretionary funds

b. potential sources of financing are –any type of bank loan, bonds, and common and preferred stock.

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