Case study: Financing policies

AAA, Inc, a manufacturer, hired you as a financial analysist. You verified AAA financial documents and you encountered the following information.

To: Julian Jones, CEO

From: A. Banks, Controller

Date: February 1, 20X4

Subject: Financing options

Hi Ms. Jones,

Following our previous correspondence about the financing options for our new project. My team has determined several possible levels of working capital that involve fundamental decisions regarding our firms liquidity and the maturity composition of dent portfolio.

I have listed the three financing options below. Each option has advantages and disadvantages. I will discuss further details at our next meeting.

Option 1: $75 million equity and long-term debt against long-term assets, permanent working capital, and temporary working capital; $5 million short-term overdrafts and bank loans against temporary working capital.

Option 2: $55 million equity and long-term debt against long-term assets and permanent working capital; $30 million short-term overdrafts and bank loans against temporary working capital and temporary working capital.

Option 3: $65 million equity and long-term debt against long-term assets and permanent working capital; $15 million short-term overdrafts and bank loans against temporary working capital.

For your reference, I have attached a summary of our firms working structure for the most recent 3 years.

Please let me know if you have any questions.

Regards, Julian Jones

AAA Inc.

Summary of Working Capital (WC) Structure

Year	WC-Slack Season (million)	WC-Slack Season (million)
2XX1	$55	$65
2XX2	$55	$72
2XX3	$55	$70

Prepared by JJ.

To: Amanda Banks, Controller

From: R. Blake, Accounting Manager

Date: February 1, 2XX4

Subject: Financing options

Hi Amanda,

As your requested, below are the current outstanding amounts of our capital funds.

Sources of funds	Dollar amount (in millions)
Mortgage bonds, $1000 par, 7.5%, due 2X30	$105
Debentures, $1000 par, 8%, due 2X29	215
Preferred stock, $100 par, 7.5%	90
Commercial loan, due in 11 months	10
Common stock, $10 par	100
Commercial paper	25
Retained earnings	325

Let me know if you need more information, RB

Using the information provided above, answer the following questions.

1. Classify the options in the Controller e-mail as conservative policy, moderate policy, or aggressive policy.
2. Determine the appropriate amount of capital in 20X4 corresponding to
   1. Temporary working capital for 20X4
   2. Permanente working capital for 20X4
3. From the e-mail of R Blake, determine the type of financing (Long-term financing, short-term financing, or spontaneous financing) for each source of funds.