Question

Garden Depot is a retailer that is preparing its budget for the upcoming fiscal year. Management has prepared the following summary of its budgeted cash flows: 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter   Total cash receipts $290,000     $440,000     $320,000     $340,000       Total cash disbursements $337,000     $307,000     $297,000     $317,000     The company’s beginning cash balance for the upcoming fiscal year will be $42,000. The company requires a minimum cash balance of $10,000 and may borrow any amount needed from a local bank at a quarterly interest rate of 3%. The company may borrow any amount at the beginning of any quarter and may repay its loans, or any part of its loans, at the end of any quarter. Interest payments are due on any principal at the time it is repaid. For simplicity, assume that interest is not compounded.

Garden Depot Cash Budget 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Year Beginning cash balance Total cash receipts 0 Total cash available 0 0 0 0 0 Less total cash disbursements 0 Excess of cash available over disbursements 0 0 0 0 0 Financing: Borrowings 0 Repayments 0 Interest 0 Total financing 0 0 0 0 0 Ending cash balance $0 $0 $0 $0 $0

Answer 1

Working:

Note:

Quarterly interest rate is 3%. It is given that company borrow any amount at the beginning of the quarter, and repay it at the end of any quarter.

Company borrowed $15,000 in the beginning of the first quarter. It had surplus in its second quarter, and repays the principal of $15,000 and interest at the end of 2nd quarter. Hence, interest has to paid for 2 quarters. $15,000 is multiplied with 3% × 2 quater to determine interest rate of $900.