Sowla Electronics currently has $2 million in cash and marketable securities, a

$3 million bank line of credit of which $1.3 million is in use, pays a cash dividend on its stock of $1.2 million annually, plans capital expenditures of $4 million a year, and devotes $2 million a year to advertising and special promotions.

In addition, it spends $2 million a year on research and development.

The company's sales are highly correlated with swings in sales of integrated circuits. Currently, the firm is enjoying good times with annual after-tax profits and depreciation (cash flow) totaling $7 million. As it sells mainly to jobbers, finished goods inventories are minimal.

a. If the integrated circuit cycle moves into a recession and cash flow drops by $5 million, what would you do? Do you have proper flexibility now for the unforeseen?

b. What if a negative cash flow of $9 million per annum were experienced?