Question

RTY Company’s year-end balance sheet for 2018 and forecasted quarterly cash flows for 2019 are given below. Company always pays for its purchases one quarter after the purchase. 50% of all sales are collected in the current quarter and 50% in the next quarter. Other expenses are paid in the current quarter. a. Prepare the quarterly cash budget for the company for 2019. b. Assuming all forecasts will be accurate, how much external long-term financing will the company need if the company does not want to use any short-term financing at all?

Balance Sheet Year-end 2018 (million$) Assets Liablities Cash 5 Accounts Payable 40 Accounts Receivable 25 Inventory 70 Long-term Debt 160 Net Fixed Assets 400 Equity 300 Total Assets 500 Total Liabilities and Equity 500 2019 Forecasts (million $) Quarter 1 Quarter 2 Quarter 3 Quarter 4 Sales 50 20 120 30 Purchases 40 30 50 50 Other expenses 10 10 10 10

Answer 1

a]		Quarter 1	Quarter 2	Quarter 3	Quarter 4
	Beginning balance	$ 5	$                   5	$               -10	$               20
	Cash collections	$                   50	$                 35	$                 70	$               75
		[25+25]	[25+10]	[10+60]	[60+15]
	Total cash available	$                   55	$                 40	$                 60	$               95
	Cash disbursements:
	For purchases	$                   40	$                 40	$                 30	$               50
	Other expenses	$                   10	$                 10	$                 10	$               10
	Total cash disbursements	$                   50	$                 50	$                 40	$               60
	Ending cash balance	$                      5	$               -10	$                 20	$               35
b]	External LT finance needed = $10 million.
	If the company can use ST debt, it need borrow only $10 million + required minimum cash for
	1 month.