Fundamentals of Corporate Finance
Fundamentals of Corporate Finance
11th Edition
ISBN: 9780077861704
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Bradford D Jordan Professor
Publisher: McGraw-Hill Education
bartleby

Concept explainers

bartleby

Videos

Question
Book Icon
Chapter 18, Problem 3M
Summary Introduction

Case summary:

Company P manufacturing is the manufacturer of cardboard boxes. The company decided to put all its receivables in one shoebox and all payables in others. Due this disorganized system, the company employed Person X. The company has a cash balance of $240,000 and planning to purchase a new box folding in the fourth quarter at a cost of $445,000. The purchase of machinery is in cash mode because of offered discounts. It needs to maintain minimum cash balance of $100,000.

Characters in the case:

  • Company P: The manufacturer
  • Person X: The new employee

To determine: The cash balance and short term financial plans of P manufacturers.

Introduction:

Cash budget is the numerical expression of cash inflows and outflows of the company during a specific period.

Expert Solution & Answer
Check Mark

Explanation of Solution

Adequate information:

The Company’s sales during the four quarters are $1,240,000, $1, 370, 000, $1,450,000. The projected sales for Q1 are $1,290,000 and accounts receivables period of 53 days and accounts receivables amounts to $630,000 and 20% of accounts receivables are irrecoverable,

P manufacturing orders 50 percent of next quarter's projected gross sales in the current quarter, and suppliers are paid in 42 days. Wages, taxes, and other costs are 30% of gross sales. Interest is $130,000 and the bank pays 1.5% on short-term borrowings and 1% on deposits.

When the P Company decides to offer a discount of 110,net 40* then the sales remains unchanged and the effect of offering the discount will reduce the dollar values received via sales. This brings a change to the P Company’s cash flows.

Compute the net sales after discount:

Net sales of Q1=$1,240,000×0.40×(10.01)+$1,240,000(0.60)=$496,000(0.99)+$744,000=$491,040+$744,000=$1,235,040

Net sales of Q2=$1,310,000×0.40×(10.01)+$1,310,000(0.60)=$524,000(0.99)+$786,000=$518,760+$786,000=$1,304,760

Net sales of Q3=$1,370,000×0.40×(10.01)+$1,370,000(0.60)=$548,000(0.99)+$822,000=$542,520+822,000=$1,364,520

Net sales of Q4=$1,450,000×0.40×(10.01)+$1,450,000(0.60)=$580,000(0.99)+$870,000=$574,200+$870,000=$1,444,200

Determine the cash balance when the company maintains minimum cash balance of $100,000:

Note: Since the sale value is reduced and the accounts receivables reduced to 36 days, the cash balance will be calculated on the reduced sale value.

Compute the net cash inflow of each quarter:

A/R at beginning of Qcollected$504,000.00$494,016.00$521,904.00$545,808.00
Sales collection incurrent Q$741,024.00$782,856.00$818,712.00$866,520.00
Purchases last Q paidthis Q–$289,333.33–$305,666.67–$319,666.67–$338,333.33
Purchase for next Q paidthis Q–$349,333.33–$365,333.33–$386,666.67–$344,000.00
Expenses–$372,000.00–$393,000.00–$411,000.00–$435,000.00
Interest and dividends–$130,000.00–$130,000.00–$130,000.00–$130,000.00
Outlay   –$445,000.00
Net cash inflow$104,357.33$82,872.00$93,282.67–$280,005.33

Working notes:

A/R at beginning of Q collected:

Q1 0.80 of current sales and remaining quarters be 3690 of previous year.

Accounts receivable from current quarter sales: 903690 of current sales

Q1=

Purchases last Q paid this Q : 42 90(Current quarter sales)(0.50)

Purchase for next Q paid this Q: [(90  42)90](Current quarter sales)(0.50) . Expenses: 30% on currents sales

Note: Refer excel for above cash budget calculation

Compute the net cash balance of each quarter:

ParticularsQ1Q2Q3Q4
Beginning cash balance$240,000.00$344,357.33$427,229.33$520,512.00
Net cash inflow$104,357.33$82,872.00$93,282.67($280,005.33)
Ending cash balance$344,357.33$427,229.33$520,512.00$240,506.67
Minimum cash balance$100,000.00$100,000.00$100,000.00$100,000.00
Cumulative surplus(deficit)$244,357.33$327,229.33$420,512.00$140,506.67

Compute short-term financial plan:

ParticularsQ1Q2Q3Q4
Target cash balance$100,000.00$100,000.00$100,000.00$100,000.00
Net cash inflow$104,357.33$82,872.00$93,282.67–$280,005.33
New short-term investments–$105,757.33–$85,329.57–$96,593.540
Income on short-terminvestments (WN:1)$1,400.00$2,457.57$3,310.87$4,276.80
Short-term investments sold$0$0$0$275,728.53
New short-term borrowing$0$0$0$0
Interest on short-term borrowing$0$0$0$0
Short-term borrowing repaid$0$0$0$0
Ending cash balance$100,000.00$100,000.00$100,000.00$100,000.00
Minimum cash balance–$100,000.00–$100,000.00–$100,000.00–$100,000.00
Cumulative surplus (deficit)$0$0$0$0
Beginning short-term investments$140,000.00$245,757.33$331,086.91$427,680.44
Ending short-term investments(WN:2)$245,757.33$331,086.91$427,680.44$151,951.91
Beginning short-term debt$0$0$0$0
Ending short-term debt$0$0$0$0

Working notes: 1

Compute interest on each quarter and net cash cost:

QuarterExcess fundsInterestrateInterest paid
(or received)
1$140,0000.01$1,400
2$245,7570.01$2,458
3$331,086.910.01$3,310.87
4$427,680.440.01$4,276.80
Net cashcost  $11,445

Working notes: 2

Q1Q2Q3Q4
$140,000$245,757.33$331,086.90$427680.44
$105,757.33$85,329.57$96,593.54($275,728.53)
$245,757.33$331,086.90$427,680.44$151,951.91

Hence, the net cash cost is $11,445.

To determine: The effective annual rate

Compute the effective interest rate:

EAR=(1+(0.0110.01))365301=(1.0101)365301=1.130051=0.13005or 13.01%

Hence, the effective annual rate is 13.01%.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!
Students have asked these similar questions
Treasury securities are issued and backed by the U.S. government and, therefore, are considered to be the lowest-risk securities on the market. As an investor looking for protection against inflation, you are considering the purchase of inflation-adjusted bonds known as U.S. Treasury Inflation-Protected Securities (TIPS). With these securities, the face value (which is paid at maturity) and the bond interest rate (which is paid semiannually) is regularly adjusted to account for inflation. However, for this problem only, assume the semi-annual interest payment (called the bond dividend) remains the same. You purchased a 10-year $10,000 TIPS bond with dividend of 4% per year payable semiannually (i.e., $200 every 6 months). Assume there is no inflation adjustment for the first 5 years, but in years 6 through 10, the bond face value increases by $850 each year. You use an expected investment return of 11% per year compounded semiannually. NOTE: This is a multi-part question. Once an…
Nataro, Incorporated, has sales of $698,000, costs of $344,000, depreciation expense of $89,000, interest expense of $54,000, and a tax rate of 21 percent. What is the net income for this firm? Note: Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32. Net income
Greenland is a small country with only listed stocks on its stock exchange. Using the following data create a market capitalisation index. Stock Price on Index Creation Number of Shares issued Day $45 300 B $70 500 C $18 600 D $11 900 If the value of the stock index is set at 100 on the index creation date, what will be the value of the index when stock prices are the following: Stock A Stock Price $35 B $78 C $15 D $9

Chapter 18 Solutions

Fundamentals of Corporate Finance

Ch. 18.4 - Prob. 18.4ACQCh. 18.4 - Prob. 18.4BCQCh. 18.5 - Prob. 18.5ACQCh. 18.5 - Describe two types of secured loans.Ch. 18.6 - Prob. 18.6ACQCh. 18.6 - In Table 18.6, what would happen to Fun Toys...Ch. 18 - Prob. 18.1CTFCh. 18 - A firm has an operating cycle of 64 days and a...Ch. 18 - Prob. 18.4CTFCh. 18 - Prob. 18.5CTFCh. 18 - Operating Cycle [LO1] What are some of the...Ch. 18 - Prob. 2CRCTCh. 18 - Prob. 3CRCTCh. 18 - Cost of Current Assets [LO2] Loftis Manufacturing,...Ch. 18 - Operating and Cash Cycles [LO1] Is it possible for...Ch. 18 - Use the following information to answer Questions...Ch. 18 - Use the following information to answer Questions...Ch. 18 - Prob. 8CRCTCh. 18 - Use the following information to answer Questions...Ch. 18 - Use the following information to answer Questions...Ch. 18 - Changes in the Cash Account [LO4] Indicate the...Ch. 18 - Prob. 2QPCh. 18 - Changes in the Operating Cycle [LO1] Indicate the...Ch. 18 - Prob. 4QPCh. 18 - Calculating Cash Collections [LO3] The Morning...Ch. 18 - Prob. 6QPCh. 18 - Prob. 7QPCh. 18 - Calculating Payments [LO3] Sedman, Corp., has...Ch. 18 - Calculating Payments [LO3] The Torrey Pine...Ch. 18 - Calculating Cash Collections [LO3] The following...Ch. 18 - Calculating the Cash Budget [LO3] Here are some...Ch. 18 - Prob. 12QPCh. 18 - Prob. 13QPCh. 18 - Prob. 14QPCh. 18 - Calculating the Cash Budget [LO3] Wildcat, Inc.,...Ch. 18 - Prob. 16QPCh. 18 - Costs of Borrowing [LO3] In exchange for a 400...Ch. 18 - Prob. 18QPCh. 18 - Prob. 1MCh. 18 - Prob. 2MCh. 18 - Prob. 3M
Knowledge Booster
Background pattern image
Finance
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.
Similar questions
SEE MORE QUESTIONS
Recommended textbooks for you
Text book image
Managerial Accounting: The Cornerstone of Busines...
Accounting
ISBN:9781337115773
Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher:Cengage Learning
Responsibility Accounting| Responsibility Centers and Segments| US CMA Part 1| US CMA course; Master Budget and Responsibility Accounting-Intro to Managerial Accounting- Su. 2013-Prof. Gershberg; Author: Mera Skill; Rutgers Accounting Web;https://www.youtube.com/watch?v=SYQ4u1BP24g;License: Standard YouTube License, CC-BY