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P1 Aggressive versus conservative seasonal funding strategy. Dynabase Tool has forecast its total funds requirements for the coming year as shown in the following table.
| P1 Aggressive versus conservative seasonal funding strategy. Dynabase Tool has forecast its total funds requirements for the coming year as shown in the following table. | |||||||||
| 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 | ||||||
| a. | 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. | ||||||||
| 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. | ||||||||
| Answer - fill in the blue boxes below. | |||||||||
| a. | 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. | ||||||||
| Month | Total Funds Requirements | Permanent Requirements | Seasonal Requirements | ||||||
| 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 | ||||||||
| Average monthly | |||||||||
| 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. | ||||||||
| Aggressive strategy: | |||||||||
| Average monthly permanent | $0 | ||||||||
| Average monthly seasonal | $0 | ||||||||
| Cost of long-term funds | 10% | ||||||||
| Cost of short-term funds | 5% | ||||||||
| Cost of aggressive strategy | |||||||||
| Conservative strategy: | |||||||||
| Firm borrows peak monthly need | |||||||||
| Average amount of monthly surplus cash | |||||||||
| Interest on surplus cash | 3% | ||||||||
| Interest paid on borrowing | |||||||||
| Interest received on surplus cash | |||||||||
| Cost of conservative strategy | |||||||||
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Financial Stability Website Fraud Confidence And The Wealth Of Nations
Authors: Frederick L. Feldkamp, R. Christopher Whalen
2nd Edition
1118935799, 978-1118935798
