Question

Wildcat, Inc., has estimated sales (in millions) for the next four quarters as follows:

	Q1			Q2			Q3			Q4
Sales	$	170		$	190		$	210		$	240

  
Sales for the first quarter of the year after this one are projected at $185 million. Accounts receivable at the beginning of the year were $73 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 $18 million per quarter.

Wildcat plans a major capital outlay in the second quarter of $99 million. Finally, the company started the year with a $79 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.

WILDCAT, INC. Short-Term Financial Plan (in millions)
			Q1			Q2			Q3			Q4
Beginning cash balance		$	40.00		$	40.00		$	40.00		$	40.00
Net cash inflow
New short-term investments
Income from short-term investments
Short-term investments sold
New short-term borrowing
Interest on short-term borrowing
Short-term borrowing repaid
Ending cash balance		$			$			$			$
Minimum cash balance
Cumulative surplus (deficit)		$			$			$			$
Beginning short-term investments		$			$			$			$
Ending short-term investments		$			$			$			$
Beginning short-term debt		$			$			$			$
Ending short-term debt		$			$			$			$
a-2. What is the net cash cost (total interest paid minus total investment income earned) 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 (total interest paid minus total investment income earned) for the year under this target cash balance?

Answer 1

	Qtr 1	qtr 2	qtr 3	qtr 4	next year Q1
Sales	$170	190	210	240	185
Collection -45 days period
1/2 of current period and 1/2 of last period
36 days payable period means
Payable= 3/5 of current orders+2/5 of old orders
Calculation of cash flow=Last period Accounts receivable+1/2 current period of sales-(3/5*.45*next period sale)-(2/5*.45*current period sale)-wages expenses-other expenditure
Q1=$73+(1/2*170)-(3/5*.45*190)-(2/5*.45*170)-(.2*170)-18	24.10
Q2=(1/2*170)+(1/2*190)-(3/5*.45*210)-(2/5*.45*190)-(190*20%)-99-18	-65.9
Q3=(1/2*190)+(1/2*210)-(3/5*.45*240)-(2/5*.45*210)-(210*20%)-18	37.4
Q4=(1/2*210)+(1/2*240)-(3/5*.45*185)-(2/5*.45*240)-(240*20%)-18	65.85
WILDCAT, INC.
Short-Term Financial Plan
(in millions)
	Q1	Q2	Q3	Q4
Beginning cash balance	$73	$40	$40	$40
Net cash inflow	24.10	-65.9	37.4	65.85			61
New short-term investments	-57.10		0	65.85
Income from short-term investments	0	1.14	0	0
		(57.1*2%)		0
Short-term investments sold	0	58.24	0	0
New short-term borrowing	0	7.66	0	0
		65.9-58.24
Interest on short-term borrowing	0	0	-0.23	0.00
			(7.66*3%)	(5.16*3%)
Short-term borrowing repaid	0	0	-7.66	0.00
Ending cash balance	$40	40	40	40
Minimum cash balance	-40	-40	-40	-40
Cumulative surplus (deficit)	0	0	0	0
Beginning short-term investments	0	57.10	0	0
Ending short-term investments	57.10	0	0	65.85
Beginning short-term debt	0	0	7.66	0.00
Ending short-term debt	0	7.66	0.00	0
ans a2
net cash cost
.23-1.14	-0.91
Its net interest income of -.91
ans 2
	Q1	Q2	Q3	Q4
Beginning cash balance	$73	$20	$20	$20
Net cash inflow	24.10	-65.90	37.40	65.85
New short-term investments	-77.10		0	65.85	(65.85-.15-5.16)
Income from short-term investments	0	1.54	0.20	0.95
			(9.88*2%)	(47.28*2%)
Short-term investments sold	0	67.22	0	0
		(65.9*1.02)
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