Paymore Products places orders for goods equal to 80% of its sales forecast in t

Question

Paymore Products places orders for goods equal to 80% of its sales forecast in the next quarter. The sales forecasts for the next five quarters are as follows:

The firm pays for its goods with a 1-month delay. Therefore, on average, three-fourths of purchases are paid for in the quarter that they are purchased, and one-fourth are paid in the following quarter.

Paymore%u2019s customers pay their bills with a 2-month delay. Therefore, on average, two-fourths of sales are collected in the quarter that they are sold, and two-fourths are collected in the following quarter. Assume that sales in the last quarter of the previous year were $380.

Paymore%u2019s labor and administrative expenses are $55 per quarter and that interest on long-term debt is $40 per quarter.

Suppose that Paymore%u2019s cash balance at the start of the first quarter is $42 and its minimum acceptable cash balance is $40. Work out the short-term financing requirements for the firm in the coming year. The firm pays no dividends. (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations.)

Quarter in Coming Year

Following Year

  First   Second   Third   Fourth    First Quarter   Sales forecast $420 $400 $380 $430 $430        

Explanation / Answer

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