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Greenwich Industries has forecasted its monthly needs for working capital (net of spontaneous sources, such as...

Greenwich Industries has forecasted its monthly needs for working capital (net of
spontaneous sources, such as accounts payable) for 2016 as follows:
Month Amount Month Amount
January $7,500,000 July $6,000,000
February 6,000,000 August 7,500,000
March 3,000,000 September 8,500,000
April 2,500,000 October 9,000,000
May 3,500,000 November 9,500,000
June 4,500,000 December 9,000,000
Short-term borrowing (that is, a bank line of credit) costs the company 10 percent,
and long-term borrowing (that is, term loans) costs the company 12 percent. Any
funds in excess of its monthly needs can be invested in interest-bearing marketable
securities to yield 8 percent per annum. •a. Suppose the company follows a conservative policy by financing the maximum
amount of its working capital requirements for the coming year with longterm
borrowing and investing any excess funds in short-term marketable
securities. Determine Greenwich’s net interest costs during 2016 under this
policy.
b. Suppose the company follows an aggressive policy by financing all its working
capital requirements for the coming year with short-term borrowing. Determine
Greenwich’s interest costs during 2016 under this policy.
c. Discuss the profitability versus risk trade-offs associated with these conservative
and aggressive working capital financing policies.

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