
Concept explainers
a.
To identify: The company would be able or not to boost the profit, if it changes the cash management policy.
Cash management:
Cash management refers to that arrangement in which the company manages the cash inflows and
a.

Explanation of Solution
Statement to show the surplus or deficit
Particulars |
Quarter 1 (million $) |
Quarter 2 (million $) |
Quarter 3 (million $) |
Quarter 4 (million $) |
Beginning cash balance | 20 | 20 | 20 | 20 |
Net |
5.80 | (24.64) | 3.64 | 25.40 |
Less: New short-term investments | 6.14 | 22.53 | ||
Income on short-term investment | 0.24 | 0.36 | ||
Short-term investments sold | 18.04 | |||
New short-term borrowings | 6.24 | |||
Less: Interest on short-term borrowings | 0.19 | 0.08 | ||
Short-term borrowing repaid | 3.45 | 0.279 | ||
Ending cash balance | 19.90 | 20 | 20 | 22.51 |
Minimum cash balance | 20 | 20 | 20 | 20 |
Cumulative Surplus/deficit | (0.10) | 2.51 | ||
Beginning short-term investments | 12 | 18.04 | ||
Ending short-term investments | 18.04 | 22.53 | ||
Beginning short-term debt | 0 | 0 | 6.24 | 2.79 |
Ending short-term debt | 0 | 6.24 | 2.79 | 0 |
Table (1)
Compute the net cash cost
The interest income in Quarter 1 is $0.24.
The interest income in Quarter 2 is $0.36.
The interest expense in Quarter 3 is $0.19.
The interest expense in Quarter 4 is $0.08.
Formula to compute the net cash cost:
Substitute $0.24 for interest earned in Quarter 1, $0.36 for interest earned in Quarter 2, $0.19 for interest expense in Quarter 3 and $0.08 for interest expense in Quarter 4,
Working Note:
Statement to show the computation of net cash inflows:
Particular |
Quarter 1 (million $) |
Quarter 2 (million $) |
Quarter 3 (million $) |
Quarter 4 (million $) |
Beginning receivables | 34 | 52.50 | 45 | 61 |
Add: Sales | 105 | 90 | 122 | 140 |
Less: Collection of accounts | 86.5 | 97.50 | 106 | 131 |
Ending receivables | 52.5 | 45 | 61 | 70 |
Payment of accounts | 43.20 | 49.14 | 59.76 | 57.6 |
Add: Wages, taxes, and expenses | 31.5 | 27 | 36.6 | 42 |
Add: Capital expenditures | 40 | |||
Add: Interest and dividends | 6 | 6 | 6 | 6 |
Total cash disbursements | 80.70 | 122.14 | 102.36 | 105.60 |
Total cash collections | 86.50 | 97.50 | 106 | 131 |
Total ash disbursements | 80.70 | 122.14 | 102.36 | 105.60 |
Net cash inflow | 5.80 | (24.64) | 3.64 | 25.40 |
Table (2)
Compute the interest income in Quarter 1:
Compute the interest income in Quarter 2:
Compute the interest expenditure in Quarter 3:
Compute the interest expenditure in Quarter 4:
Hence, the net cash cost is $0.33.
b.
To identify: The company would be able or not to boost the profit, if it changes the cash management policy.
b.

Explanation of Solution
Statement to show the surplus or deficit:
Particulars |
Quarter 1 (million $) |
Quarter 2 (million $) |
Quarter 3 (million $) |
Quarter 4 (million $) |
Beginning cash balance | 10 | 20 | 20 | 20 |
Net cash inflow | 5.80 | (24.64) | 3.64 | 25.40 |
Less: New short-term investments | 6.24 | 3.72 | 25.56 | |
Income on short-term investment | 0.44 | 0.56 | 0.08 | 0.16 |
Short-term investments sold | 24.08 | |||
New short-term borrowings | ||||
Less: Interest on short-term borrowings | ||||
Short-term borrowing repaid | ||||
Ending cash balance | 19.90 | 20 | 22.51 | |
Less: Minimum cash balance | 10 | 10 | 10 | 10 |
Cumulative Surplus/deficit | ||||
Beginning short-term investments | 22 | 28.247 | 4.16 | 7.89 |
Ending short-term investments | 28.24 | 4.16 | 7.89 | 33.6 |
Beginning short-term debt | 0 | 0 | 0 | 0 |
Ending short-term debt | 0 | 0 | 0 | 0 |
Table (3)
Compute the net cash cost
The interest income in Quarter 1 is $0.44.
The interest income in Quarter 2 is $0.56.
The interest income in Quarter 3 is $0.08.
The interest income in Quarter 4 is $0.16.
Formula to compute the net cash cost:
Substitute $0.44 for interest earned in Quarter 1, $0.56 for interest earned in Quarter 2, $0.08 for interest expense in Quarter 3 and $0.16 for interest expense in Quarter 4,
Working Note:
Compute the interest income in Quarter 1:
Compute the interest income in Quarter 2:
Compute the interest income in Quarter 3:
Compute the interest income in Quarter 4:
No, the company should not change the cash management policy as these policies give the more net cash cost and the company can consider any other factors but it is not necessary for it.
Company should not change its cash management policy as its net cash cost increases.
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Chapter 26 Solutions
EBK CORPORATE FINANCE
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