CASE STUDY #$21$

Source: Fundamentals of Corporate Finance, Ross,$12$e: McGraw$-$Hill Publications

WORKING CAPITAL MANAGEMENT

You have recently been hired to work in your company$$s newly established treasury

department. The company is a small company that produces cardboard boxes in a variety of

sizes for different purchases. The owner of the company, works primarily in the sales and

production areas of the company. Currently, the company puts all receivables in one shoe box

and all payables in another. Because of the disorganized system, the finance area needs work $$

and that$$s what you have been brought in to do$.$

The company currently has a cash balance of $$305,000$ and it plans to purchase new box$-$folding

machinery in the fourth quarter at a cost of $$525,000.$ The machinery will be purchased with

cash because of a discount offered. The company$$s policy is to maintain a minimum cash

balance of #$125,000.$ All sales and purchases are made on credit.

The owner has projected the following gross sales for each of the next four quarters.

Also, gross sales for the first quarter of the next year are projected at $$1,405,000.$ The company

currently has an accounts receivable period of $53$ days and an accounts receivable balance of

$$645,000.20\%$ of the accounts receivable balance is from a company that has just entered

bankruptcy, and it is likely this portion of the accounts receivable will never be collected.

The company typically orders $50\%$ of the next quarter$$s projected gross sales in the current

quarter, and suppliers are typically paid in $42$ days. Wages, taxes and other costs run about $30\%$

of gross sales. The company has a quarterly interest payment of $$135,000$ on its long tern debt.

The company uses a local bank for its short$-$term financial needs. It pays $1\mathrm{.}5\%$ per quarter on all

short$-$term borrowing and maintains a money market accounts that pays $1\%$ per quarter on all

short$-$term deposits.

You have been asked to prepare a cash budget and short$-$term financial plan for the company

under the current policies. You have also been asked to prepare additional$/$alternative plans

based on changes in several inputs.

FIN$3403$ CASE STUDY #$22$

Source: Fundamentals of Corporate Finance, Ross,$12$e: McGraw$-$Hill Publications

REQUIRED:

Respond to the following questions. Written responses must comprise at least three complete

sentences, with proper grammar and punctuation. Cite any referenced materials using APA format.

In the Excel spreadsheets provided, all calculations that support your answers must be shown as

formulae.

$1.$ Use the numbers given to complete the cash budget and short$-$tern financial plan in Excel.

$($Sheet $1)$

$2.$ Rework the cash budget and short$-$term financial plan assuming the minimum balance is

changed to $$100,000($Sheet $2)$

$3.$ You have looked at the credit policy offered by the competition and determined that the

industry standard credit policy is $1/19$ net $40.$ The discount will begin to be offered on the first

day of the first quarter. You want to examine how this credit policy would affect the cash budget

and short$-$term financial plan. If this credit policy is implemented, you believe that $40\%$ of all

sales will take advantage of it$,$ and the outstanding accounts receivable period will decline to $36$

days.

a$.$ Rework the cash budget and short$-$term financial plan under the new credit policy and a

minimum cash balance of $$100,000.($Sheet $3)$

b$.$ What interest rate are you effectively offering your customers?

$4.$ You have talked to the company$$s suppliers about the credit terms that you receive. Currently,

the company receives terms of net $45.$ The suppliers have stated that they would offer new

credit terms of $1\mathrm{.}5/15,$ net $40.$ The discount would begin to be offered on the first day of the

first quarter.

a$.$ What interest rate are suppliers offering the company?

b$.$ Rework the cash budget and short$-$term financial plan assuming you take the offered

credit terms on all orders and the minimum cash balance is $$100,000.$ Also assume the

company offers the credit terms detailed in Question $3.($Sheet $4)$