Wildcat, Inc., has estimated sales (in millions) for the next four quarters as f
ID: 2742628 • Letter: W
Question
Wildcat, Inc., has estimated sales (in millions) for the next four quarters as follows: Q1 Q2 Q3 Q4 Sales $ 125 $ 145 $ 165 $ 195 Sales for the first quarter of the year after this one are projected at $140 million. Accounts receivable at the beginning of the year were $55 million. Wildcat has a 45-day collection period. Wildcat’s purchases from suppliers in a quarter are equal to 45 percent of the next quarter’s forecasted sales, and suppliers are normally paid in 36 days. Wages, taxes, and other expenses run about 20 percent of sales. Interest and dividends are $10 million per quarter. Wildcat plans a major capital outlay in the second quarter of $81 million. Finally, the company started the year with a $70 million cash balance and wishes to maintain a $40 million minimum balance. a-1. 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. a-2. What is the net cash cost for the year under this target cash balance? b-1. Complete the following short-term financial plan assuming that Wildcat maintains a minimum cash balance of $20 million. b-2. What is the net cash cost for the year under this target cash balance?
Explanation / Answer
A 45-day collection period means sales collections each quarter are:
Collections = (1/2) current sales + (1/2) old salesA
36-day payables period means payables each quarter are:
Payables = (3/5) current orders + (2/5) old orders
So, the cash inflows each quarter are:
Q1 = $79 + (1/2)($125) – (2/5)(.45)($125) – (3/5)(.45)($145) – .30($125) – $10
Q1= $27.925
Q2 = (1/2)($125) + (1/2)($145) – (2/5)(.45)($145) – (3/5)(.45)($165) – .30($145) – $10 – 81
Q2 = –$37.825
Q3 = (1/2)($145) + (1/2)($165) – (2/5)(.45)($165) – (3/5)(.45)($195) – .30($165) – $10
Q3 = $49.48
Q4 = (1/2)($165) + (1/2)($195) – (2/5)(.45)($195) – (3/5)(.45)($140) – .30($195) – $10
Q4 = $72.5
The company’s cash budget will be:
WILDCAT, INC.
Cash Budget
(in millions)
Q1
Q2
Q3
Q4
Beginning cash balance
70
97.925
60.05
109.525
Net cash inflow
27.925
-37.875
49.475
72.5
Ending cash balance
97.925
60.05
109.525
182.025
Minimum cash balance
40
40
40
40
Cumulative surplus (deficit)
57.925
20.05
69.525
142.025
30
57.925
20.05
69.525
WILDCAT, INC.
Short-Term Financial Plan
(in millions)
Q1
Q2
Q3
Q4
Beginning cash balance
40
40
40
40
Net cash inflow
27.925
-37.875
49.475
72.5
New short-term investments
-55.85
0
-98.95
-145
Income on short-term investments
0.6
1.1585
0.401
1.3905
Short-term investments sold
39.0335
New short-term borrowing
Interest on short-term borrowing
Short-term borrowing repaid
0.06
Ending cash balance
40
40
40
40
Minimum cash balance
-40
-40
-40
-40
Cumulative surplus (deficit)
Beginning short-term investments
Ending short-term investments
Beginning short-term debt
Ending short-term debt
WILDCAT, INC.
Cash Budget
(in millions)
Q1
Q2
Q3
Q4
Beginning cash balance
70
97.925
60.05
109.525
Net cash inflow
27.925
-37.875
49.475
72.5
Ending cash balance
97.925
60.05
109.525
182.025
Minimum cash balance
40
40
40
40
Cumulative surplus (deficit)
57.925
20.05
69.525
142.025
30
57.925
20.05
69.525
WILDCAT, INC.
Short-Term Financial Plan
(in millions)
Q1
Q2
Q3
Q4
Beginning cash balance
40
40
40
40
Net cash inflow
27.925
-37.875
49.475
72.5
New short-term investments
-55.85
0
-98.95
-145
Income on short-term investments
0.6
1.1585
0.401
1.3905
Short-term investments sold
39.0335
New short-term borrowing
Interest on short-term borrowing
Short-term borrowing repaid
0.06
Ending cash balance
40
40
40
40
Minimum cash balance
-40
-40
-40
-40
Cumulative surplus (deficit)
Beginning short-term investments
Ending short-term investments
Beginning short-term debt
Ending short-term debt
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