10. a. The November sales must have been the total uncollected sales minus the uncollected sales
from December, divided by the collection rate two months after the sale, so:
b. The December sales are the uncollected sales from December divided by the collection rate of
the previous months’ sales, so:
c. The collections each month for this company are:
Collections = .15(Sales from 2 months ago) + .20(Last month’s sales) + .65 (Current sales)
11. The sales collections each month will be:
Given this collection, the cash budget will be:
April May June
Beginning cash balance $135,000 $90,020 $70,205
Cash receipts
12. Item Source/Use Amount
Cash Source $928
Accounts payable Source $2,337
Intermediate
13. a. If you borrow $50,000,000, the compensating balance will be:
Your total repayment will be based on the full amount of the loan including the compensating
balance, so at the end of the year you will owe:
You will receive your compensating balance back at the end, so the year-end cash flow will be:
However, with the compensating balance, you will only get the use of:
This means the periodic interest rate is:
FV = PV(1 + R)
b. To end up with $15,000,000, you must borrow:
The total interest you will pay on the loan is:
14. a. The EAR of your investment account is:
b. To calculate the EAR of the loan, we can divide the interest on the loan by the amount of the
And the interest you will pay to the bank on the loan is:
So, the EAR of the loan in the amount of $45 million is:
c. The compensating balance is only applied to the unused portion of the credit line, so the EAR
of a loan on the full credit line is:
15. a. A 45-day collection period means sales collections each quarter are:
Collections = 1/2 current sales + 1/2 prior quarter’s sales
So, the cash inflows and disbursements each quarter are:
Q1 Q2 Q3 Q4
Beginning receivables $68.00 $80.00 $87.50 $95.00
Payment of accounts $76.05 $82.80 $92.25 $84.60
Total cash collections $148.00 $167.50 $182.50 $202.50
WILDCAT, INC.
Cash Budget
(in millions)
Q1 Q2 Q3 Q4
Beginning cash balance $49.00 $68.95 $22.90 $53.65
With a $30 million minimum cash balance, the short-term financial plan will be:
WILDCAT, INC.
Short-Term Financial Plan
(in millions)
b.
Q1 Q2 Q3 Q4
Target cash balance $30.00 $30.00 $30.00 $30.00
Net cash inflow 19.95 –46.05 30.75 52.15
New short-term investments –20.33 0 –24.64 –52.64
Beginning short-term investments $19.00 $39.33 $0 $24.64
Below you will find the interest paid (or received) for each quarter:
Q1: excess funds of $194 invested for one quarter earns .02($19) = $.38 in income
16. a. With a minimum cash balance of $40 million, the short-term financial plan will be:
WILDCAT, INC.
Short-Term Financial Plan
(in millions)
Q1 Q2 Q3 Q4
Target cash balance $40.00 $40.00 $40.00 $40.00
Net cash inflow 19.95 –46.05 30.75 52.15
New short-term investments –20.13 0 –13.92 –52.43
Income on short-term investments .18 .58 0 .28
Beginning short-term investments $9.00 $29.13 $0 $13.92
Below you will find the interest paid (or received) for each quarter:
Q1: excess funds at start of quarter of $9 invested for one quarter earns .02($9) = $.18 in
income
b. And with a minimum cash balance of $20 million, the short-term financial plan will be:
WILDCAT, INC.
Short-Term Financial Plan
(in millions)
Q1 Q2 Q3 Q4
Target cash balance $20.00 $20.00 $20.00 $20.00
Net cash inflow 19.95 –46.05 30.75 52.15
New short-term investments –20.83 0 –31.15 –53.17
Income on short-term investments 0.88 1.30 0.4 1.02
Beginning short-term investments $44.00 $64.83 $20.08 $51.23
Below you will find the interest paid (or received) for each quarter:
Q1: excess funds at start of quarter of $29 invested for one quarter earns .02($29) = $.58
income
Since cash has an opportunity cost, the firm can boost its profit if it keeps its minimum cash balance
low and invests the cash instead. However, the tradeoff is that in the event of unforeseen
circumstances, the firm may not be able to meet its short-run obligations if enough cash is not
available.
Challenge
17. a. For every dollar borrowed, you pay interest of:
You also must maintain a compensating balance of 4.5 percent of the funds borrowed, so for
each dollar borrowed, you will only receive:
We can adjust the EAR equation we have been using to account for the compensating balance
by dividing the EAR by one minus the compensating balance, so:
Another way to calculate the EAR is using the FVIF (or PVIF). For each dollar borrowed, we
must repay:
At the end of the year the compensating will be returned, so your net cash flow at the end of the
year will be:
The present value of the end of year cash flow is the amount you receive at the beginning of the
year, so the EAR is:
FV = PV(1 + R)
b. The EAR is the amount of interest paid on the loan divided by the amount received when the
loan is originated. The amount of interest you will pay on the loan is the amount of the loan
times the effective annual interest rate, so:
For whatever loan amount you take, you will only receive 95.5 percent of that amount since
So, the EAR of the loan is:
18. You will pay interest of:
Additionally, the compensating balance on the loan is:
Since this is a discount loan, you will receive the loan amount minus the interest payment. You will
also not get to use the compensating balance. So, the amount of money you will actually receive on a
$25 million loan is:
The EAR is the interest amount divided by the loan amount, so:
We can also use the FVIF (or PVIF) here to calculate the EAR. Your cash flow at the beginning of
So, using the time value of money, the EAR is:
$23,750,000 = $21,812,500(1 + R)