Nano Seconds is a chain of retail stores specializing in purchasing, refurbishing, and reselling personal computer systems. Nano Seconds extends no credit to its customers and uses trade credit, paying all trade obligations within one month of purchase. The company has expanded at a rate of one store every six months, leasing all its retail space and making little investment in plant and equipment.

The management of Nano Seconds is concerned about the cash needs of the company in the next year. Forecasted sales for the next four quarters are as follows:

Nano Seconds has a line of credit of $250 million from banks, any loans from which must be fully paid back by the end of the September quarter; any financing needs beyond short-term bank loans will be met with long-term debt.

a. Prepare a cash budget for Nano Seconds and a pro forma balance sheet and income statement using the analysis-of-accounts method. List any assumptions.

b. Discuss the role of the bank financing constraint on the pro forma statements. If Nano Seconds is able to renegotiate its line of credit, what maximum amount would you recommend?
Explain you recommendation.

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Quarter Forecasted Sales June 2005 $600 million September 2005 $550 million December 2005 $610 million March 2006 $650 million