LG4 14-1 Compensating Balance Interest Rate Suppose your firm is seeking a four-year,
amortizing $200,000 loan with annual payments and your bank is offering you the choice
between a $205,000 loan with a $5,000 compensating balance and a $200,000 loan without a
compensating balance. If the interest rate on the $200,000 loan is 9.8 percent, how low would
the interest rate on the loan with the compensating balance have to be in order for you to choose
it?
LG8 14-2 Optimal Cash Replenishment Level Rose Axels faces a smooth annual demand for cash
of $5,000,000, incurs transaction costs of $275 every time they sell marketable securities, and
can earn 4.3 percent on their marketable securities. What will be their optimal cash
year, and the trading cost per sale or purchase of marketable securities to be $27.50 per
transaction. What will be their optimal cash return point?
The daily interest rate on marketable securities will be equal to:
365
1.047 1 0.000126
day
i= – =
And the optimal cash return point will be equal to:
LG8 14-6 Optimal Upper Cash Limit Veggie Burgers, Inc., would like to maintain their cash
account at a minimum level of $245,000, but expect the standard deviation in net daily cash
flows to be $12,000, the effective annual rate on marketable securities to be 3.7 percent per year,
and the trading cost per sale or purchase of marketable securities to be $27.50 per transaction.
What will be their optimal upper cash limit?
The daily interest rate on marketable securities will be equal to:
365
1.037 1 0.000100
day
i= – =
And the optimal cash return point and upper limit will be equal to:
( ) ( ) ( )
( ) ( )
* 2
3
2
3
*
3 / 4
3 $27.50 $12,000 / 4 0.000100 $245,000
$276,015.57
3 $ 276,015.57 2 $245,000
$338, 046.71
day
Z F i L
H
s= +
= ´ +
=
= –
=
LG8 14-7 Optimal Upper Cash Limit HotFoot Shoes would like to maintain their cash account at
a minimum level of $25,000, but expect the standard deviation in net daily cash flows to be
$2,000, the effective annual rate on marketable securities to be 3.5 percent per year, and the
trading cost per sale or purchase of marketable securities to be $200 per transaction. What will
be their optimal upper cash limit?
The daily interest rate on marketable securities will be equal to:
365
1.035 1 0.000094
day
i= – =
And the optimal cash return point and upper limit will be equal to:
( ) ( ) ( )
( ) ( )
* 2
3
2
3
*
3 / 4
3 $200 $2, 000 / 4 0.000094 $25, 000
$43,533.14
3 $43, 533.14 2 $25, 000
$80,599.43
day
Z F i L
H
s= +
= ´ +
=
= –
=
Appendix
LG1214A-1 Cumulative Net Cash Flow The net cash flow for a firm in January, February, and March
are $-2.5 million, $-3.0 million, and $2.4 million. What is the cumulative net cash flow for
March?
LG1214A-2 Cumulative Net Cash Flow The Net Cash Flow for a firm in January, February, and
March are $3.5 million, $-1.0 million, and $1.4 million. What is the Cumulative Net Cash Flow
for March?
LG1214A-3 Cash Disbursement The Hug’a’Bear company makes its teddy bears the month before
they are sold. If sales of $2.5 million are expected in November and the firm pays 50 percent of
sales in material costs, then what is the materials cash disbursement in October?
LG1214A-4 Cash Disbursement The Snow Adventures Company makes its snowboards the month
before they are sold. If sales of $7.8 million are expected in November and the firm pays 65
percent of sales in material costs, then what is the materials cash disbursement in October? (
LG1214A-5 Cash Collection Consider a company that has sales in May, June, and July of $10 million,
$12 million, and $9 million, respectively. The firm is paid by 35 percent of its customers in
the month of the sale, 40 percent in the following month, and 22 percent in the next month (3
percent are bad sales and never pay). What is the cash collected in July?
LG1214A-6 Cash Collection Consider a company that has sales in May, June, and July of $11 million,
$10 million, and $12 million, respectively. The firm is paid by 25 percent of its customers in the
month of the sale, 50 percent in the following month, and 23 percent in the next month (2 percent
are bad sales and never pay). What is the cash collected in July?
LG1214A-7 Cash Surplus or Deficit A firm has estimated the following two month cash budget. What
is the cash surplus or deficit for these two months? \
Mar Apr
Sales 120 130
Cash collection 84.0 90.0
Total cash disbursement 90.0 85.0
Net cash flow -6.0 5.0
Cumulative net cash
flow -15.0 ?
Minimum cash balance 10.0 10.0
Cash surplus or deficit ? ?
LG12 14A-8 Cash Surplus or Deficit A firm has estimated the following two month cash budget.
What is the cash surplus or deficit for these two months?
Mar Apr
Sales 75 68
Cash collection 63.0 65.0
Total cash disbursement 60.0 57.0
Net cash flow 3.0 8.0
LG12 14A-9 Cash Budget Spreadsheet Problem The company from the text, Yellow Jacket, has
decided to change its production strategy. Instead of a steady production throughout the year,
they will produce the coats they estimate to sell in the month prior. This will impact the materials
and wage disbursements of the cash budget. (For the December computation, assume that the
following January sales with increase by 10 percent from the prior year.) Build this cash budget.
How does this impact the cash surplus/deficit of the firm?