FINE3025, Sem 1, 2023-24, Dr.

Yang Duan

FIN3025 Entrepreneurial Finance (Section 1/2)

Exercise 2 (Lecture 5 Managing Cash Flow)
1. (25 pts) The Itsar Products Company has made the following monthly estimates of
cash receipts and cash disbursements when preparing cash budgets for the next 12
months. Itsar Products has beginning cash on hand of $10,000 and wants to
maintain this minimum cash level (i.e., minimum cash desired is $10,000)
throughout the next year.

MONTH CASH CASH

RECEIPTS DISBURSEMENTS
($ in ($ in thousands)
thousands)
Jan 100 110
Feb 100 110
Mar 80 110
Apr 110 120
May 120 180
Jun 150 180
July 200 180
Aug 250 180
Sep 250 150
Oct 200 110
Nov 140 100
Dec 100 100

A. Determine whether Itsar Products will have a cash need (a need for borrowing)
during the next year. If Itsar Products has a cash need, indicate the month
when the need will begin. (15 pts)
B. Determine whether the cash need (if any) can be repaid within the next year
(assuming no financing costs). Indicate the month when the cash need will be
repaid (if any). (10 pts)

2. (25 pts) Rework Problem 1 assuming minimum cash-on-hand requirements are

$10,000 a month through April, increase to $15,000 in May and June, increase
further to $20,000 in July and August, and return to the $10,000 per month level
beginning in September.
 FINE3025, Sem 1, 2023-24, Dr. Yang Duan

3. (50 pts) The PDA Products Company was started in 2013. A difficult operating
year, 2014, was followed by a profitable 2015. However, the founders are still
concerned about the venture’s liquidity position and the amount of cash being
used to operate the firm.

2014 2015
Income statement
(in thousands) (in thousands)
Net sales $900 $1,500
COGS 540 900
Gross profit 360 600
Marketing 90 150
General and administrative 200 200
Research and development 50 50
Depreciation 40 40
EBIT -20 160
Interest 45 60
Earnings before taxes -65 100
Income taxes 0 25
Net income (loss) ($65) $75

Dec 31, 2014 Dec 31, 2015

Balance sheet
(in thousands) (in thousands)
Cash $50 $20
Accounts receivable 100 180
Prepaid expenses 100 100
Inventories 400 500
Total current assets 650 800
Net fixed assets 350 400
Total assets $1,000 $1,200

Accounts payable $130 $160

Accrued wages 50 70
Bank loan 90 100
Total current liabilities 270 330
Long-term debt 300 400
Common stock 350 350
Retained earnings 80 120
 FINE3025, Sem 1, 2023-24, Dr. Yang Duan

Total liabilities and equity $1,000 $1,200

A. Determine the firm’s cash build and cash burn for 2015. Did PDA have a net
cash build or a net cash burn for 2015? (30 pts)
B. Calculate the length of PDC’s cash conversion cycle for 2015. (20 pts)