Greenwich Industries has forecasted its monthly needs for working capital (net of spontaneous sources, such as accounts payable) for 2010 as follows:

Month Amount Month Amount January $7,500,000 July $6,000,000 February 6,000,000 August 7,500,000 March 3,000,000 September 8,500,000 April 2,500,000 October 9,000,000 May 3,500,000 November 9,500,000 June 4,500,000 December 9,000,000 Short-term borrowing (that is, a bank line of credit) costs the company 10 percent and long-term borrowing (that is, term loans) costs the company 12 percent. Any funds in excess of its monthly needs can be invested in interest-bearing marketable securities to yield 8 percent per annum.

•a. Suppose the company follows a conservative policy by financing the maximum amount of its working capital requirements for the coming year with long-term borrowing and investing any excess funds in short-term marketable securities.

Determine Greenwich’s net interest costs during 2010 under this policy.

b. Suppose the company follows an aggressive policy by financing all its working capital requirements for the coming year with short-term borrowing. Determine Greenwich’s interest costs during 2010 under this policy.

c. Discuss the profitability versus risk trade-offs associated with these conservative and aggressive working capital financing policies. LO1