Dynabase Tool has forecast its total funds requirements for the coming year as shown in the table:

January $2,000,000

February 2,000,000

March 2,000,000

April 4,000,000

May 6,000,000

June 9,000,000

July 12,000,000

August 14,000,000

September 9,000,000

October 5,000,000

November 4,000,000

December 3,000,000

• Divide the firms monthly funds requirement into (1) a permanent component and (2) a seasonal component, and find the monthly average for each of these components.
• 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.
• 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.
• Discuss the profitability-risk trade-offs associated with the aggressive strategy and those associated with the conservative strategy.