Wildcat, Inc., has estimated sales (in millions) for the next four quarters as f
ID: 2699220 • Letter: W
Question
Wildcat, Inc., has estimated sales (in millions) for the next four quarters as follows:
Sales for the first quarter of the year after this one are projected at $125 million. Accounts receivable at the beginning of the year were $49 million. Wildcat has a 45-day collection period.
Wildcat%u2019s purchases from suppliers in a quarter are equal to 40 percent of the next quarter%u2019s forecast sales, and suppliers are normally paid in 36 days. Wages, taxes, and other expenses run about 20 percent of sales. Interest and dividends are $11 million per quarter.
Wildcat plans a major capital outlay in the second quarter of $78 million. Finally, the company started the year with a $67 million cash balance and wishes to maintain a $40 million minimum balance.
Assume that Wildcat can borrow any needed funds on a short-term basis at a rate of 3 percent per quarter and can invest any excess funds in short-term marketable securities at a rate of 2 percent per quarter. Complete the following short-term financial plan for Wildcat. (Enter your answers in millions. Negative amounts should be indicated by a minus sign. Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))
What is the net cash cost for the year under this target cash balance? (Negative amount should be indicated by a minus sign. Enter your answers in millions. Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
Complete the following short-term financial plan assuming that Wildcat maintains a minimum cash balance of $20 million. (Enter your answers in millions. Negative amounts should be indicated by a minus sign. Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))
What is the net cash cost for the year under this target cash balance? (Enter your answers in millions. Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
Explanation / Answer
ANSWER
The company%u2019s cash budget will be:
WILDCAT, INC.
Cash Budget
(in millions)
Beginning cash balance
$64.00
$72.80
$15.95
$30.95
Net cash inflow
8.80
%u201356.85
15.00
52.45
Ending cash balance
$72.80
$15.95
$30.95
$83.40
Minimum cash balance
%u201320.00
%u201320.00
%u201320.00
%u201320.00
Cumulative surplus (deficit)
$52.80
%u2013$4.05
$10.95
$63.40
With a $20M minimum cash balance, the short-term financial plan will be:
WILDCAT, INC.
Short-Term Financial Plan
(in millions)
b.
Beginning cash balance
$20.00
$20.00
$20.00
$20.00
Net cash inflow
8.80
%u201356.85
15.00
52.45
New short-term investments
%u20139.68
0
%u201312.84
%u201352.71
Income on short-term investments
0.88
1.07
0
0.26
Short-term investments sold
0
53.68
0
0
New short-term borrowing
0
2.10
0
0
Interest on short-term borrowing
0
0
%u20130.06
0
Short-term borrowing repaid
0
0
%u20132.10
0
Ending cash balance
$20.00
$20.00
$20.00
$20.00
Minimum cash balance
%u201320.00
%u201320.00
%u201320.00
%u201320.00
Cumulative surplus (deficit)
$0
$0
$0
$0
Beginning short-term investments
$44.00
$53.68
$0
$12.84
Ending short-term investments
53.68
0
12.84
65.55
Beginning short-term debt
0
0
2.10
0
Ending short-term debt
0
2.10
0
0
Below you will find the interest paid (or received) for each quarter:
Q1: excess funds of $44 invested for 1 quarter earns .02($44) = $0.88 income
Q2: excess funds of $53.68 invested for 1 quarter earns .02($53.68) = $1.07 in income
Q3: shortage of funds of $2.10 borrowed for 1 quarter costs .03($2.10) = $0.06 in interest
Q4: excess funds of $12.84 invested for 1 quarter earns .02($12.84) = $0.26 in income
Net cash cost = $0.88 + 1.07 %u2013 0.06 + 0.26 = $2.15
Q1
Q2
Q3
Q4
Beginning cash balance
$64.00
$72.80
$15.95
$30.95
Net cash inflow
8.80
%u201356.85
15.00
52.45
Ending cash balance
$72.80
$15.95
$30.95
$83.40
Minimum cash balance
%u201320.00
%u201320.00
%u201320.00
%u201320.00
Cumulative surplus (deficit)
$52.80
%u2013$4.05
$10.95
$63.40
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