Question

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

		Q1			Q2			Q3			Q4
Sales		$	125		$	145		$	165		$	195

  
Sales for the first quarter of the year after this one are projected at $140 million. Accounts receivable at the beginning of the year were $55 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 $10 million per quarter.

Wildcat plans a major capital outlay in the second quarter of $81 million. Finally, the company started the year with a cash balance of $70 million and wishes to maintain a minimum balance of $30 million.

a. Complete the following cash budget for Wildcat, Inc. (Enter your answers in millions. A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

WILDCAT, INC. Cash Budget (in millions)
			Q1			Q2			Q3			Q4
Beginning cash balance		$	70.00		$			$			$
Net cash inflow
Ending cash balance		$			$			$			$
Minimum cash balance			–30.00			–30.00			–30.00			–30.00
Cumulative surplus (deficit)		$			$			$			$

  
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.

b-1. Complete the following short-term financial plan for Wildcat, Inc. (Enter your answers in millions. A negative answer should be indicated by a minus sign. Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

WILDCAT, INC. Short-Term Financial Plan (in millions)
			Q1			Q2			Q3			Q4
Minimum cash balance		$	30.00		$	30.00		$	30.00		$	30.00
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		$			$			$			$

  
b-2. What is the net cash cost (total interest paid minus total investment income earned) for the year? (A negative answer should be indicated by a minus sign. Enter your answer in millions. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
  
Net cash cost           $

Answer 1

If the collection period is 45 days, which is 1/2 of a quarter, the receivables for each quarter outstanding is 1/2 of each quarters sales.

	Q1	Q2	Q3	Q4
Receivables at Beginning	55.00	62.50	72.50	82.50
Expected Sales	125.00	145	165	195
Receivables at End ( Quarterly Sales * 0.5)	62.50	72.50	82.50	97.50
Cash Inflow From Receivables	117.50	135.00	155.00	180.00

Similarly the Payables outstanding would be 36/90 or 0.4% of the cost of goods. Using this we can estimate the beginning balance of payables to be:

45% X Q1 Sales X 0.4 = 45% X 125 X 0.4 = $22.50

	Q1	Q2	Q3	Q4
Payables at Beginning	22.50	26.10	29.70	35.10
Expected Cost (45% of next quarter sale)	65.25	74.25	87.75	63.00
Payables at End (Quarterly Cost * 0.4)	26.10	29.70	35.10	25.20
Cash Outflow to Payables	-61.65	-70.65	-82.35	-72.90

The other cash flows involved are:

	Q1	Q2	Q3	Q4
Outflow for Wages, taxes and other expenses	-25.00	-29.00	-33.00	-39.00
Outflow for Interest and Dividends	-10.00	-10.00	-10.00	-10.00
Capital Outlay		-81.00

Question 1

Using the above figures, we can prepare the cash budget as follows:

	Q1	Q2	Q3	Q4
Beginning cash balance	70.00	90.85	35.20	64.85
Net cash inflow	20.85	-55.65	29.65	58.10
Ending cash balance	90.85	35.20	64.85	122.95
Minimum cash balance	-30.00	-30.00	-30.00	-30.00
Cumulative surplus (deficit)	60.85	5.20	34.85	92.95

Question 2

Using the above info we can prepare the short term finance plan:

	Q1	Q2	Q3	Q4	For the year
Minimum cash balance	30.00	30.00	30.00	30.00
Net cash inflow	20.85	-55.65	29.65	58.10
New short-term investments	20.85	-	29.65	58.10
Income from short-term investments (2% X Beginning Short Term Investments)	0.80	1.22	0.10	0.70	2.818
Short-term investments sold	-	-55.65	-	-
New short-term borrowing
Interest on short-term borrowing (3% X Beginning Short Term Debt)	-	-	-	-	0
Short-term borrowing repaid
Ending cash balance	90.85	35.20	64.85	122.95
Beginning short-term investments	40.00	60.85	5.20	34.85
Ending short-term investments	60.85	5.20	34.85	92.95
Beginning short-term debt	-	-	-	-
Ending short-term debt	-	-	-	-

Question 3

As seen in the above table, the company has not borrowed funds in any of the 4 quarters. The income from investing the excess cash amounts to $2.818M