CAPITAL MANAGEMENT

You have recently been hired by Keafer Manufacturing to work in its newly established treasury

department. Keafer Manufacturing is a small company that produces highly customized cardboard

boxes in a variety of sizes for different purchasers. Adam Keafer, the owner of the company, works

primarily in the sales and production areas of the company. Currently, the company basically puts all

receivables in one pile and all payables in another, and a part$-$time bookkeeper periodically comes in

and attacks the piles. Because of this disorganized system, the $$ nance area needs work, and that$$s

what you$$ve been brought in to do$.$

The company currently has a cash balance of $$170,000,$ and it plans to purchase new machinery

in the third quarter at a cost of $$300,000.$ The purchase of the machinery will be made with cash

because of the discount offered for a cash purchase. Adam wants to maintain a minimum cash bal$-$ance

of $$130,000$ to guard against unforeseen contingencies. All of Keafer$$s sales to customers and

purchases from suppliers are made with credit, and no discounts are offered or taken.

The company had the following sales each quarter of the year just ended:

Q$1$ Q$2$ Q$3$ Q$4$

Gross sales $$847,000$ $$878,000$ $$942,000$ $$818,000$

After some research and discussions with customers, you$$re projecting that sales will be $8$ percent

higher in each quarter next year. Sales for the $$ rst quarter of the following year are also expected to

grow at $8$ percent. You calculate that Keafer currently has an accounts receivable period of $57$ days

and an accounts receivable balance of $$639,000.$ However, $10$ percent of the accounts receivable

balance is from a company that has just entered bankruptcy, and it is likely that this portion will never

be collected.

You$$ve also calculated that Keafer typically orders supplies each quarter in the amount of $50$ per$-$cent

of the next quarter$$s projected gross sales, and suppliers are paid in $53$ days on average. Wages,

taxes, and other costs run about $25$ percent of gross sales. The company has a quarterly interest

payment of $$180,000$ on its long$-$term debt. Finally, the company uses a local bank for its short$-$term

$$ nancial needs. It currently pays $1\mathrm{.}2$ percent per quarter on all short$-$term borrowing and maintains a

money market account that pays $\mathrm{.}5$ percent per quarter on all short$-$term deposits.

Adam has asked you to prepare a cash budget and short$-$term $$ nancial plan for the company

under the current policies. He has also asked you to prepare additional plans based on changes in

several inputs.

$1.$ Use the numbers given to complete the cash budget and short$-$term $$ nancial plan.

$2.$ Rework the cash budget and short$-$term $$ nancial plan assuming Keafer changes to a minimum

cash balance of $$100,000.$

$3.$ Rework the sales budget assuming an $11$ percent growth rate in sales and a $5$ percent growth

rate in sales. Assume a $$130,000$ target cash balance.

$4.$ Assuming the company sales grow at $8$ percent, what target cash balance would result in a zero

need for short$-$term $$ nancing? To answer this question, you may need to set up a spreadsheet

and use the $$Solver$$ function.

$5.$ You have looked at competitors$$ credit policies and have determined that the industry standard

credit policy is $1/10,$ net $45.$ The interpretation of these credit terms is that a purchaser will

receive a $1$ percent discount on sales if it pays within $10$ days. If the purchaser does not pay

within $10$ days, the full sales price is due in $45$ days. You want to examine how a switch to this

credit policy would affect your cash budget and short$-$term $$ nancial plan. If this credit policy

is implemented, you estimate that $25$ percent of all customers will take advantage of it$,$ and the

accounts receivable period will decline to $38$ days. Rework the cash budget and short$-$term $-$nancial

plan under the new credit policy and a minimum cash balance of $$130,000.$ What interest

rate is implied by the credit terms?

$6.$ You have talked to the company$$s main supplier about the credit terms Keafer receives. The

supplier has stated that it would be willing to offer new credit terms of $2/15,$ net $40.$ The inter$-$pretation

of these credit terms is that Keafer will receive a $2$ percent discount on sales if it pays

within $15$ days. If it does not pay within $15$ days, the full sales price will be due in $40$ days. What

interest rate are the suppliers offering the company? Rework the cash budget and short$-$term

$$ nancial plan assuming you take the credit terms on all orders and the minimum cash balance

is $$130,000.$

Please show excel input$/$output$.$