Concept explainers
a.
To identify: The company would be able or not to boost the profit, if it changes the cash management policy.
Cash management:
Cash management refers to that arrangement in which the company manages the cash inflows and
a.
Explanation of Solution
Statement to show the surplus or deficit
Particulars |
Quarter 1 (million $) |
Quarter 2 (million $) |
Quarter 3 (million $) |
Quarter 4 (million $) |
Beginning cash balance | 20 | 20 | 20 | 20 |
Net |
5.80 | (24.64) | 3.64 | 25.40 |
Less: New short-term investments | 6.14 | 22.53 | ||
Income on short-term investment | 0.24 | 0.36 | ||
Short-term investments sold | 18.04 | |||
New short-term borrowings | 6.24 | |||
Less: Interest on short-term borrowings | 0.19 | 0.08 | ||
Short-term borrowing repaid | 3.45 | 0.279 | ||
Ending cash balance | 19.90 | 20 | 20 | 22.51 |
Minimum cash balance | 20 | 20 | 20 | 20 |
Cumulative Surplus/deficit | (0.10) | 2.51 | ||
Beginning short-term investments | 12 | 18.04 | ||
Ending short-term investments | 18.04 | 22.53 | ||
Beginning short-term debt | 0 | 0 | 6.24 | 2.79 |
Ending short-term debt | 0 | 6.24 | 2.79 | 0 |
Table (1)
Compute the net cash cost
The interest income in Quarter 1 is $0.24.
The interest income in Quarter 2 is $0.36.
The interest expense in Quarter 3 is $0.19.
The interest expense in Quarter 4 is $0.08.
Formula to compute the net cash cost:
Substitute $0.24 for interest earned in Quarter 1, $0.36 for interest earned in Quarter 2, $0.19 for interest expense in Quarter 3 and $0.08 for interest expense in Quarter 4,
Working Note:
Statement to show the computation of net cash inflows:
Particular |
Quarter 1 (million $) |
Quarter 2 (million $) |
Quarter 3 (million $) |
Quarter 4 (million $) |
Beginning receivables | 34 | 52.50 | 45 | 61 |
Add: Sales | 105 | 90 | 122 | 140 |
Less: Collection of accounts | 86.5 | 97.50 | 106 | 131 |
Ending receivables | 52.5 | 45 | 61 | 70 |
Payment of accounts | 43.20 | 49.14 | 59.76 | 57.6 |
Add: Wages, taxes, and expenses | 31.5 | 27 | 36.6 | 42 |
Add: Capital expenditures | 40 | |||
Add: Interest and dividends | 6 | 6 | 6 | 6 |
Total cash disbursements | 80.70 | 122.14 | 102.36 | 105.60 |
Total cash collections | 86.50 | 97.50 | 106 | 131 |
Total ash disbursements | 80.70 | 122.14 | 102.36 | 105.60 |
Net cash inflow | 5.80 | (24.64) | 3.64 | 25.40 |
Table (2)
Compute the interest income in Quarter 1:
Compute the interest income in Quarter 2:
Compute the interest expenditure in Quarter 3:
Compute the interest expenditure in Quarter 4:
Hence, the net cash cost is $0.33.
b.
To identify: The company would be able or not to boost the profit, if it changes the cash management policy.
b.
Explanation of Solution
Statement to show the surplus or deficit:
Particulars |
Quarter 1 (million $) |
Quarter 2 (million $) |
Quarter 3 (million $) |
Quarter 4 (million $) |
Beginning cash balance | 10 | 20 | 20 | 20 |
Net cash inflow | 5.80 | (24.64) | 3.64 | 25.40 |
Less: New short-term investments | 6.24 | 3.72 | 25.56 | |
Income on short-term investment | 0.44 | 0.56 | 0.08 | 0.16 |
Short-term investments sold | 24.08 | |||
New short-term borrowings | ||||
Less: Interest on short-term borrowings | ||||
Short-term borrowing repaid | ||||
Ending cash balance | 19.90 | 20 | 22.51 | |
Less: Minimum cash balance | 10 | 10 | 10 | 10 |
Cumulative Surplus/deficit | ||||
Beginning short-term investments | 22 | 28.247 | 4.16 | 7.89 |
Ending short-term investments | 28.24 | 4.16 | 7.89 | 33.6 |
Beginning short-term debt | 0 | 0 | 0 | 0 |
Ending short-term debt | 0 | 0 | 0 | 0 |
Table (3)
Compute the net cash cost
The interest income in Quarter 1 is $0.44.
The interest income in Quarter 2 is $0.56.
The interest income in Quarter 3 is $0.08.
The interest income in Quarter 4 is $0.16.
Formula to compute the net cash cost:
Substitute $0.44 for interest earned in Quarter 1, $0.56 for interest earned in Quarter 2, $0.08 for interest expense in Quarter 3 and $0.16 for interest expense in Quarter 4,
Working Note:
Compute the interest income in Quarter 1:
Compute the interest income in Quarter 2:
Compute the interest income in Quarter 3:
Compute the interest income in Quarter 4:
No, the company should not change the cash management policy as these policies give the more net cash cost and the company can consider any other factors but it is not necessary for it.
Company should not change its cash management policy as its net cash cost increases.
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Chapter 26 Solutions
CORPORATE FINANCE(LL)
- 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 declined, 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.arrow_forwardOptimal Cash Transfer Barenbaum Industries projects that cash outlays of 4.5 million will occur uniformly throughout the year. Barenbaum plans to meet its cash requirements by periodically selling marketable securities from its portfolio. The firms marketable securities are invested to earn 12%, and the cost per transaction of converting securities to cash is 27. a. Use the Baumol model to determine the optimal transaction size for transfers from marketable securities to cash. b. What will be Barenbaums average cash balance? c. How many transfers per year will be required? d. What will be Barenbaums total annual cost of maintaining cash balances? What would the total cost be if the company maintained an average cash balance of 50,000 or of 0 (it deposits funds daily to meet cash requirements)?arrow_forwardCASH 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 Helens 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. a. Prepare a monthly cash budget for the last 6 months of 2016. b. Prepare monthly estimates of the required financing or excess fundsthat is, the amount of money Bowers will need to borrow or will have available to invest. 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. d. Bowers sales are seasonal; and her company produces on a seasonal basis, just ahead of sales. Without making any calculations, discuss how the companys 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 firms ability to obtain bank credit? Explain. e. f. g. h.arrow_forward
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