Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

The company currently has a cash balance of $ 1 7 0 , 0 0 0 , and it plans to purchase new machinery in

The company currently has a cash balance of $170,000, and it plans to purchase new machinery in the third quarter at a cost of
$325,000. The purchase of the machinery will be made with cash because of the discount offered for a cash purchase. Adam
wants to maintain a minimum cash balance of $130,000 to guard against unforeseen contingencies. All of Keafer's sales to
customers and purchases from suppliers are made with credit, and no discounts are offered or taken.
The company had the following sales each quarter of the year just ended:
After some research and discussions with customers, you're projecting that sales will be 8 percent higher in each quarter next
year. Sales for the first quarter of the following year are also expected to grow at 8 percent. You calculate that Keafer currently
has an accounts recelvable period of 57 days and an accounts recelvable balance of $683,000. However, 10 percent of the
accounts receivable balance is from a company that has just entered bankruptcy, and it is likely that this portion will never be
collected.
ou've also calculated that Keafer typically orders supplies each quarter in the amount of 50 percent of the next quarter's
rojected gross sales, and suppliers are paid in 53 days, on average. Wages, taxes, and other costs run about 25 percent of
ross sales. The company has a quarterly interest payment of $190,000 on its long-term debt. Finally, the company uses a local
ank for its short-term financial needs. It currently pays 1.2 percent per quarter on all short-term borrowing and maintains a
oney market account that pays .5 percent per quarter on all short-term deposits.
dam has asked you to prepare a cash budget and short-term financial plan for the company under the current policies. He has
so asked you to prepare additional plans based on changes in several inputs.
Use the numbers given to complete the cash budget and short-term financial plan.
Rework the cash budget and short-term financial plan assuming Keafer changes to a minimum cash balance of $100,000.
. Rework the sales budget assuming an 11 percent growth rate in sales and a 5 percent growth rate in sales. Assume a
$100,000 target cash balance.
Assuming the company's sales grow at 8 percent, what target cash balance would result in a zero need for short-term
financing? To answer this question, you may need to set up a spreadsheet and use the "Solver" function.
You have looked at competitors' credit policies and have determined that the industry standard credit policy is 110, net 45.
The interpretation of these credit terms is that a purchaser will receive a 1 percent discount on sales if it pays within 10 days.
If the purchaser does not pay within 10 days, the full sales price is due in 45 days. You want to examine how a switch to this
credit policy would affect your cash budget and short-term financial plan. If this credit policy is implemented, you estimate
that 25 percent of all customers will take advantage of it, and the accounts recelvable period will decline to 38 days. Rework
the cash budget and short-term financial plan under the new credit policy and a minimum cash balance of $100,000. What
interest rate is implied by the credit terms?
You have talked to the company's main supplier about the credit terms Keafer receives. The supplier has stated that it would
be willing to offer new credit terms of 215, net 40. The interpretation of these credit terms is that Keafer will receive a 2
percent discount on sales if it pays within 15 days. If it does not pay within 15 days, the full sales price will be due in 40 days.
What interest rate are the suppliers offering the company? Rework the cash budget and short-term financial plan assuming
you take the credit terms on all orders and the minimum cash balance is $100,000.
image text in transcribed

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Investments

Authors: Zvi Bodie, Alex Kane, Alan Marcus, Lorne Switzer, Maureen Stapleton, Dana Boyko, Christine Panasian

9th Canadian Edition

1259271935, 9781259271939

More Books

Students also viewed these Finance questions