Ace\'s business forms has compiled several factors relative to its financing mix

Question

Ace's business forms has compiled several factors relative to its financing mix. The firm pays 8 percent on short-term funds and 10 percent on long terms funds. The firms monthly current, fixed and total asset requirments for the previous years are summarized in the table above.

Determine:

A. the monthly average permanent funds requirement
B. the monthly average seasonal funds requirement
C. the annual financing costs (aggressive strategy)
D. the annual financing costs (conservative strategy)
E. describe the difference in management action in aggressive versus conservative strategies

Month Current Assets Fixed Assets Total Assets Jan. $125,000 $250,000 $375,000 Feb. $130,000 $250,000 $280,000 March. $135,000 $250,000 $385,00 April $150,000 $250,000 $400,000 May $150,000 $250,000 $400,000 June $125,000 $250,000 $375,000 July $115,000 $250,000 $365,000 August $120,000 $250,000 $370,000 Sept. $115,000 $250,000 $370,000 Oct. $100,000 $250,000 $350,000 Nov. $110,000 $250,000 $360,000 Dec. $115,000 $250,000 $365,000

Explanation / Answer

Observe that to calculate the value of monthly average permanent funds requirement only fixed costs will be taken into account.

Calculate the monthly average permanent cost as 250000*12/12

= 250000*1

= $250000

b)

Calculate the monthly average seasonal funds requirement by taking into account only the current assets of the year.

It is calculated as the summation of the current assets of the year / 12

=(125000+130000+135000+150000+150000+125000+115000+120000+115000+100000+110000+115000) / 12

=1490000 / 12

=124166.67

c)

Observe that aggressive approach involves both fixed cost and variable cost. It involves borrowing also.

Calculate the amount of annual financing cost as per aggressive strategy as follows:

= Fixed cost * 10% + monthly average seasonal cost * 8%.

= 250000*0.10 + 124166.67*0.08

= $34,933.33

d)

Calculate the amount of the conservative approach only considers the maximum amount of total cost.

Calculate the amount of conservative approach as follows:

= 400000*0.10

= $40000.

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