P14–4 Aggressive versus conservative seasonal funding strategy Dynabase Tool has forecast its total funds requirements for the coming year as shown in the following table.

a. Divide the firm’s monthly funds requirement into (1) a permanent component and (2) a seasonal component, and find the monthly average for each of these components.

b. Describe the amount of long-term and short-term financing used to meet the total funds requirement under (1) an aggressive funding strategy and (2) a conservative funding strategy. Assume that, under the aggressive strategy, long-term funds finance permanent needs and short-term funds are used to finance seasonal needs.

c. Assuming that short-term funds cost 5% annually and that the cost of long-term funds is 10% annually, use the averages found in part a to calculate the total cost of each of the strategies described in part

b. Assume that the firm can earn 3%
on any excess cash balances.

d. Discuss the profitability–risk trade-offs associated with the aggressive strategy and those associated with the conservative strategy.

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Month Amount Month Amount January $2,000,000 July $12,000,000 February 2,000,000 August 14,000,000 March 2,000,000 September 9,000,000 April 4,000,000 October 5,000,000 May 6,000,000 November 4,000,000 June 9,000,000 December 3,000,000