Short term financial plan (Chapter 18)

Q1. Assume a company’s expected sales (in millions) by quarters is as follows:

Q1 Q2 Q3 Q4
200 300 250 400

Other related information is given below

Beginning receivable 120

Collection Receivable +0.5*sales
Acct. payable= 60% of sales
Wages, taxes, other exp. 20% of sales
Interest and Div. 20 per Quarter
Major expansion planned for quarter Q2
100
costing
Beginning cash balance= 20
Min. cash balance= 10
Interest rate per annum 20%
Interest rate per quarter= 5%

Find the short term financial plan for the company.

Cash Collection
  Q1 Q2 Q3 Q4
Beginning receivable 120 100
Sales= 200 300 250 400
Collection= 220
Receivables= 100

Cash Disbursement
  Q1 Q2 Q3 Q4
Acct. payable= 120
Other exp. 40
Capital exp. 0
Fin exp. & div. 20
Total Cash Disbursement 180
 Net Cash Flow
  Q1 Q2 Q3 Q4
Total cash collection
Total Cash Disbursement
Net Cash Flow

Cash Balance
  Q1 Q2 Q3 Q4
Beginning cash balance
Net cash flows
Ending cash balance
Min. required cash balance
Cumulative surplus or deficit
Q2. Consider the following financial statement information for the Route 66 Company:
Item Beginning   Ending
Inventory $1,273   $1,401
Accounts receivable   3,782     3,368
Accounts payable   1,795     2,025
    Net sales   $14,750  
    Cost of goods sold     11,375  
Calculate the operating and cash cycles.
Solution
Average Inventory = (1273 + 1401)/2 = 1337
Inventory Turnover = 11,375 / 1337 = 8.51 times.
Inventory Period = 365/ 8.51 = 42.9 = 43 days
Average Receivable = (3782 + 3368)/2 = 3575
Receivable Turnover = Credit sales / Ave Receivable = 14750 / 3575 =4.13 times
Receivable period = 365 / 4.13 = 88.38 days = 88 days
Average payable = (1795 + 2025)/2 = 1910
Payable turnover = COGS / Ave payable = 11,375 / 1910 = 5.96 times
Payable period = 365 / 5.96 = 61.24 days = 61 days
Operating cycle = Inventory period + Receivable period = 43 + 88 = 131 days
Cash cycle = Operating cycle – Payable period = 131 – 61 = 70 days

Q3. A company has a 60-day average collection period and wishes to maintain a $160 million
minimum cash balance. Based on this and the information given in the following cash budget,
complete the cash budget. What conclusions do you draw?
Cash Budget (in millions $)
Q1 Q2 Q3 Q4
Beginning receivables 240 100 110 120
Sales   150 165 180 135
Cash collections 240+50 = 290 100+165/3 = 155 110+180/3=170
Ending receivables 100 110 120
Total cash collections 290 155 170
Total cash disbursements 170 160 185 190
Net cash inflow 120 -5 -15
Beginning cash balance 45 120+45=165 160
Net cash inflow 120 -5 -15
Ending cash balance 165 160 145
Minimum cash balance -160 -160 -160
Cumulative surplus (deficit) 5 0 -15
Q4. For the year just ended, you have gathered the following information about a company.
1. A $ 200 dividend was paid. USE : Reduction of cash
2. Accounts payable increased by $500 : SOURCE:
3. Fixed asset purchases were $900. USE ; reduction of cash
Lable each as a source or use of cash and describe its effect on the firm’s cash balance.

Q5. A corporation has recently installed a just-in-time (JIT) inventory system. Describe the
effect this is likely to have on the corporation’s carrying costs, shortage costs, and operating
cycle.
Carrying cost: It will be reduced.
Shortage cost: it may increase due to
Operating cycle: It will be reduced as inventory period is to its minimum level.

Q6. A company has a book net worth of $10,380, long term debt is $7,500, net working
capital other than cash is $2,105. Fixed assets are $15,190.
How much cash does the company have?
If the current liabilities are $1,450, what are the current assets?

Q7 A Company has projected the following quarterly sales amounts for the coming year:

Item Beginning Ending

Inventory 9,780 11,380
Accounts receivable   4,108       4,938
Accounts payable 7,636 7,927
Credit sales 89,804
Cost of goods sold 56.384

Calculate:
1. The operating cycle, and
2. The cash cycle.

Q8 A Company has projected the following quarterly sales amounts for the coming year:
Q1-> $790, Q2 -> $740, Q3 -> $870, Q4 -> $950
a. Accounts receivable at the beginning of the year are $360. The company has a 45-day
collection period. Calculate cash collections in each of the four quarters by completing
the following
Solution
Cash Budget (in millions $)
Q1 Q2 Q3 Q4
Beginning receivables
Sales
Cash collections
Ending receivables
b. Rework (a) assuming a collection period of 60 days.
Solution
Cash Budget (in millions $)
Q1 Q2 Q3 Q4
Beginning receivables
Sales
Cash collections
Ending receivables
c. Rework (a) assuming a collection period of 30 days.
Solution:
Cash Budget (in millions $)
Q1 Q2 Q3 Q4
Beginning receivables
Sales
Cash collections
Ending receivables
Q9. You’ve worked out a line of credit arrangement that allows you to borrow up to $50
million at any time. The interest rate is 0.47 percent per month. In addition, 5 percent of the
amount that you borrow must be deposited in a non-interest-bearing account. Assume that your
bank uses compound interest on its line of credit loans.
What is the effective annual interest rate on this lending arrangement?
Suppose you need $15 million today and you repay it in six months. How much interest will you
pay?