Question #4

ABC Company contemplates the following transactions for the firstsix months of 2020. The board of the company wants to determine the funding needs of the company and financing issues on a monthly basis. The company has approached a bank to negotiate financing. It typically uses long-term debt and this is forecasted to be $42,000,000 at year-end.

The opening cash of ABC Company is $40,000,000.

Monthly 2020 sales are expected to be $16,667,000 collected through accounts receivable.

The 2020 accounts receivable are first received in month 4 and monthly thereafter.The 2019 accounts receivable will be received month 1: $15,600,000, month 2: $15,600,000 and month 3: $15,650,000 (2019 accounts receivable total $46,850,000)

2020variable cost of goods soldare 40% of sales and are paid starting in month 3 and monthly thereafter. 2019 accounts payable of $9,200,000 will be paid in month 1: $4,600,000 and month 2: $4,600,000.

Fixed costs (excluding depreciation) incost of goods soldof $1,250,000 a month are paid in the month of sale.

Other fixed costs (excluding interest) of $4,833,000 a month are paid in the month of sale.

The company will buy equipment for $55,000,000 in month 1.

Inventory of $550,000 will be purchased in month 1.

Interest of $1,000,000 will be paid in month 6. The increase in long-term debt over 2019 of $11,200,000 is to be finalized after the monthly cash flow study is complete. It is scheduled for month 12.

Taxes of $5,000,000 will be paid in months 3and6.

Dividends of $5,000,000 will be paid in month 6.

ABC Company would like $10,000,000 of cash on hand at all times for emergency purposes. It expects cash flows in thelast 6 monthsof 2020 to be $16,366,000 including the increased long-term debt.

Required:

(1)Prepare monthly cash flow budget for the first six (6) months of 2020 for ABC Company. (10 marks)

(2)Discuss the maximum financing that ABC Company will require in the first six months of 2020. Is the $11,200,000 increase in long-term debt adequate? Note: $2,000,000 of interest will be paid in the 2020 fiscal year. Also, note: the maximum long-term debt to equity ratio is 0.3:1. (4 marks)

(3)Which financing strategy has the ABC Company been using to-date? (Closest strategy) (3 marks)

(4)What terms would you negotiate regarding the financing of ABC operations? (3 marks)

(20 total marks)