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Fundamentals of Financial Manageme...

9th Edition
Eugene F. Brigham + 1 other
ISBN: 9781305635937

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Fundamentals of Financial Manageme...

9th Edition
Eugene F. Brigham + 1 other
ISBN: 9781305635937
Textbook Problem
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CASH BUDGETING Rework problem 15-10 using a spreadsheet model. After completing parts a through d, respond to the following: If Bowers’ customers began to pay late, collections would slow down, thus increasing the required loan amount. If sales dedined, this also would have an effect on the required loan. Do a sensitivity analysis that shows the effects of these two factors on the maximum loan requirement.

  15-10 CASH BUDGETING Helen Bowers, owner of Helen’s Fashion Designs, is planning to request a line of credit from her bank. She has estimated the following sales forecasts for the firm for parts of 2016 and 2017.

May 2016 $180,000
June 180,000
July 360,000
August 540,000
September 720,000
October 360,000
November 360,000
December 90,000
January 2017 180,000

 Estimates regarding payments obtained from the credit department are as follows: collected within the month of sale, 10%; collected the month following the sale. 75%; collected the second month following the sale, 15%. Payments for labor and raw materials are made the month after these services were provided. Here are the estimated costs of labor plus raw materials:

May 2016 $90,000
June 90,000
July 126,000
August 882,000
September 306,000
October 234,000
November 162,000
December 90,000

 General and administrative salaries are approximately $27,000 a month. Lease payments under long-term leases are $9,000 a month. Depredation charges are $36,000 a month. Miscellaneous expenses are $2,700 a month. Income tax payments of $63,000 are due in September and December. A progress payment of $180,000 on a new design studio must be paid in October. Cash on hand on July 1 will be $132,000, and a minimum cash balance of $90,000 should be maintained throughout the cash budget period.

  1. a. Prepare a monthly cash budget for the last 6 months of 2016.
  2. b. Prepare monthly estimates of the required financing or excess funds—that is, the amount of money Bowers will need to borrow or will have available to invest.
  3. c. Now suppose receipts from sales come in uniformly during the month (that is, cash receipts come in at the rate of 1/30 each day), but all outflows must be paid on the 5th. Will this affect the cash budget? That is, will the cash budget you prepared be valid under these assumptions? If not, what could be done to make a valid estimate of the peak financing requirements? No calculations are required, although if you prefer, you can use calculations to illustrate the effects.
  4. d. Bowers’ sales are seasonal; and her company produces on a seasonal basis, just ahead of sales. Without making any calculations, discuss how the company’s current and debt ratios would vary during the year if ail financial requirements were met with short-term bank loans. Could changes in these ratios affect the firm’s ability to obtain bank credit? Explain.
  5. e.
  6. f.
  7. g.
  8. h.

a.

Summary Introduction

To prepare: The monthly cash budget for the last six months of 2014.

Introduction:

Cash Budget:

The cash budget is an estimation of the expected cash inflows and outflows for a particular financial period. The budget estimates the receipts of the cash and disbursements that will occur in the given financial period. The projection of the cash position of the company is made with the help of the cash budget.

Explanation

The cash budget for the last six months is:

b.

Summary Introduction

To determine: The amount of money needed to be borrowed or available for investing.

c.

Summary Introduction

To determine: The effect on a cash budget and the validity of the cash budget under the given assumptions.

d.

Summary Introduction

To determine: The effect on company’s current and debt ratios and the effect on the firm’s ability to obtain credit.

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