You have recently been hired by Onica to work in its treasury department. Onica is a mid-size firm operating in lightweight metals engineering and manufacturing. Onica's aluminum products are used in aerospace, automotive, commercial transportation, packaging, building and construction, and industrial applications. Onica's management has recently tried to maintain a disciplined approach to cash balances and strengthen the balance sheet. The management has focused on actions to improve Onica's cost structure and liquidity, providing the company with the ability to operate effectively. These actions included procurement efficiencies and overhead rationalization to reduce costs, working capital initiatives, and maintaining a sustainable level of capital expenditures. Onica derives most of its revenue from aluminum-based products. The company's cost of goods sold is mainly comprised of cost of aluminum purchases. The price of aluminum has been quite volatile and unpredictable. Onica imports aluminum used in production processes from countries aluminum can be sourced at attractive prices. Onica's pricing arrangements do not allow the company to pass aluminum price fluctuations to its customers. Moreover, managers believed that if attempted to pass price increases, the company would sacrifice sales because of customers' incentives to switch to domestic and/or international competitors. 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. The management wants to maintain a minimum cash balance of $130,000 to guard against unforeseen contingencies. All of Onica'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: Q1 Q2. Q3 Q4 Gross sales: $893,000 $924,000 $996,000 $858,000

After some research and discussions with customers, you're projecting that sales will be 8 percent higher in each quarter next year (compared to the same quarter of previous year). Sales for the first quarter of the following year are also expected to grow at 8 percent. You calculate that Onica currently has an accounts receivable period of 57 days and an accounts receivable 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. You've also calculated that Onica typically orders supplies each quarter in the amount of 50 percent of the next quarter's projected gross sales, and suppliers are paid in 53 days on average. You assume that beginning payables balance in the first quarter of next year reflects

existing or new credit terms (whicever applies) and Onica's purchases based on projected sales. Wages, taxes, and other costs run about 25 percent of gross sales. The company has a quarterly interest payment of $190,000 on its long-term debt. You have been asked to use the information available to complete the cash budget and determine short-term financing needs of Onica. In addition, you would like to evaluate the cash budget and short-term financing needs of the firm under various independent scenarios as shown below: 1. An 11 percent growth rate in sales and a $100,000 target cash balance. 2. A trade war breaks out in the second quarter and a tariff is imposed on all aluminum imports into the country. The impact of the tariff is an increase in purchases. You now anticipate purchases at 60 percent of the next quarter's projected gross sales in quarter 2 and 3. You want to know answers to the following questions: a. What are the effects of this event on Onica's cash budget and short-term financing needs? b. Is either $130,000 or $100,000 in required cash balance is sufficient in this case? c. What are the possible implications of this scenario on the working capital use and capital expenditures? d. What actions management can take given tariffs and what actions could have been taken proactively? 3. You have looked at competitors' credit policies and have determined that the industry standard credit policy is 1/10, 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 receivable period will decline to 38 days. You would like a cash budget and determine short-term financing needs under the new credit policy and a minimum cash balance of $100,000. You also wonder what interest rate is implied by the credit terms. 4. You have talked to the company's main supplier about the credit terms Onica receives. The supplier has stated that it would be willing to offer new credit terms of 2/15, net 40. The interpretation of these credit terms is that Onica 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. You would like to see the effects of taking the credit terms on all orders and the minimum cash balance of $100,000 on cash budget and short-term financing needs of Onica. You also want to know what interest rate is offered by the suppliers.

Questions : 1. What are the effects of base assumptions on firm's cash budget and short-term financing needs? 2. What are the effects of each scenario on firm's cash budget and short-term financing needs? 3. What should Onica do?