1) HotFoot Shoes would like to maintain its cash account at a minimum level of $
ID: 2782491 • Letter: 1
Question
1)
HotFoot Shoes would like to maintain its cash account at a minimum level of $26,000, but expects the standard deviation in net daily cash flows to be $4,100, the effective annual rate on marketable securities to be 6.6 percent per year, and the trading cost per sale or purchase of marketable securities to be $210 per transaction.
What will be its optimal cash return point? (Use 365 days a year. Do not round intermediate calculations and round your answer to 2 decimal places.)
2)
Suppose that Wind Em Corp. currently has the balance sheet shown below, and that sales for the year just ended were $7.8 million. The firm also has a profit margin of 30 percent, a retention ratio of 15 percent, and expects sales of $8.8 million next year.
If all assets and current liabilities are expected to grow with sales, what amount of additional funds will Wind Em need from external sources to fund the expected growth? (Enter your answer in dollars not in millions.)
HotFoot Shoes would like to maintain its cash account at a minimum level of $26,000, but expects the standard deviation in net daily cash flows to be $4,100, the effective annual rate on marketable securities to be 6.6 percent per year, and the trading cost per sale or purchase of marketable securities to be $210 per transaction.
Explanation / Answer
1) Annual interest 6.60% Daily interest 0.000175 Daily cash variance 16810000 Cost per transaction 210 Minimum balance 26000 Optimal return point ((3*Cost per transaction*Daily cash variance/(4*Daily return))^1/3 + Lower limit Optimal return point ((3*210*16810000/(4*0.00017512))^(1/3) + 26000 Optimal return point 50726.97 2) Sales 7.8 Assets Liabilities and Equity Current assets 26,24,000 Current liabilities 36,22,320 Fixed assets 58,00,000 Long-term debt 19,00,000 Equity 29,01,680 Total assets 84,24,000 Total liabilities and equity 84,24,000 Next year sales 8.8 million Profit @30% 2.64 million Retained earnings 15% of profit 396000 Assets Liabilities and Equity Current assets 29,60,410 Current liabilities 40,86,720 Fixed assets 65,43,590 Long-term debt 19,00,000 Equity 32,97,680 Total assets 95,04,000 Total liabilities and equity 92,84,400 External financing required 2,19,600
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