CHAPTER 26 CASE C-1
CHAPTER 26
KEAFER MANUFACTURING WORKING
CAPITAL MANAGEMENT
1. The cash flow each quarter will consist of the sales collection, minus the suppliers paid, expenses,
dividends, interest, and capital outlays. The cash flows for each quarter will be:
Cash Flow
Q1 Q2 Q3 Q4
Collections from previous quarter $607,500.00 $753,768.00 $780,444.00 $769,500.00
Collections from current quarter
sales 436,392.00 451,836.00 445,500.00 420,948.00
Payments to suppliers for
Cash Balance
Q1 Q2 Q3 Q4
Beginning cash balance $210,000.00 $167,614.00 $267,560.00 $21,018.00
Net cash inflow –42,386.00 99,946.00 –246,542.00 116,188.48
The short-term financial plan looks like this:
Short-term Financial Plan
Target cash balance $135,000.00 $135,000.00 $135,000.00 $135,000.00
Net cash inflow –42,386.00 99,946.00 –246,542.00 116,188.48
New short-term investments 0 –100,321.00 0 –44,999.95
CHAPTER 26 CASE C-2
Short-term borrowing repaid 0 0 0 –70,344.40
Ending cash balance $135,000.00 $135,000.00 $135,000.00 $135,000.00
Beginning short-term investments $75,000.00 $75,000.00 $175,321.00 $0
Ending short-term investments 75,000.00 175,321.00 0 44,999.95
The interest calculations for each quarter and the net cash cost are:
Q1: Excess funds at start of quarter of $75,000.00 earns $375.00 in income.
Q2: Excess funds at start of quarter of $75,000.00 earns $375.00 in income.
Net cash cost
Q1 $375.00
Q2 375.00
2. If Keafer reduces its target cash balance to $90,000, the cash flows each quarter will remain the
same, so they will not be repeated here. The cash balance and short-term financial plan will be:
Cash Balance
Q1 Q2 Q3 Q4
Beginning cash balance $210,000.00 $167,614.00 $267,560.00 $21,018.00
Net cash inflow –42,386.00 99,946.00 –246,542.00 116,188.48
Short-term Financial Plan
Target cash balance $90,000.00 $90,000.00 $90,000.00 $90,000.00
Net cash inflow –42,386.00 99,946.00 –246,542.00 116,188.48
CHAPTER 26 CASE C-3
Ending cash balance $90,000.00 $90,000.00 $90,000.00 $90,000.00
Beginning short-term investments $120,000.00 $120,000.00 $220,546.00 $0
Q1: Excess funds at start of quarter of $120,000.00 earns $600.00 in income.
Q2: Excess funds at start of quarter of $120,000.00 earns $600.00 in income.
Net cash cost
Q1 $600.00
Q2 600.00
3. If the sales growth rate is 11 percent, the cash flows for each quarter will be:
Cash Flow
Q1 Q2 Q3 Q4
Collections from previous quarter $607,500.00 $774,706.00 $802,123.00 $790,875.00
Collections from current quarter
sales 448,514.00 464,387.00 457,875.00 432,641.00
Payments to suppliers for
Cash Balance
Q1 Q2 Q3 Q4
Beginning cash balance $210,000.00 $154,700.50 $262,561.67 $25,143.50
Net cash inflow –55,299.50 107,861.17 –237,418.17 117,011.64
CHAPTER 26 CASE C-4
The short-term financial plan looks like this:
Short-term Financial Plan
Target cash balance $135,000.00 $135,000.00 $135,000.00 $135,000.00
Net cash inflow –55,299.50 107,861.17 –237,418.17 117,011.64
New short-term investments 0 –108,236.17 0 –63,106.63
Income on short-term investments 375.00 375.00 916.18 0
Beginning short-term investments $75,000.00 $75,000.00 $183,236.17 $0
Ending short-term investments 75,000.00 183,236.17 0 63,106.63
The interest calculations for each quarter and the net cash cost are:
Q1: Excess funds at start of quarter of $75,000.00 earns $375.00 in income.
Q2: Excess funds at start of quarter of $75,000.00 earns $375.00 in income.
Net cash cost
Q1 $375.00
Q2 375.00
If the sales growth rate is 5 percent, the cash flows for each quarter will be:
Cash Flow
Q1 Q2 Q3 Q4
Collections from previous quarter $607,500.00 $732,830.00 $758,765.00 $748,125.00
Collections from current quarter
CHAPTER 26 CASE C-5
quarter
Expenses –289,275.00 –299,512.50 –295,312.50 –279,037.50
Cash Balance
Q1 Q2 Q3 Q4
Beginning cash balance $210,000.00 $180,527.50 $272,558.33 $16,892.50
Net cash inflow –29,472.50 92,030.83 –255,665.83 114,957.58
The short-term financial plan looks like this:
Short-term Financial Plan
Target cash balance $135,000.00 $135,000.00 $135,000.00 $135,000.00
Net cash inflow –29,472.50 92,030.83 –255,665.83 114,957.58
New short-term investments 0 –92,405.83 0 –26,485.54
Beginning short-term investments $75,000.00 $75,000.00 $167,405.83 $0
Ending short-term investments 75,000.00 167,405.83 0 26,485.54
The interest calculations for each quarter and the net cash cost are:
Q1: Excess funds at start of quarter of $75,000.00 earns $375.00 in income.
Q2: Excess funds at start of quarter of $75,000.00 earns $375.00 in income.
Net cash cost
Q1 $375.00
CHAPTER 26 CASE C-6
Q2 375.00
4. Since the only period in which there is borrowing is the third period, we can set the ending short-
term debt in Quarter 3 equal to zero and use Solver. Doing so, we find the necessary sales growth
rate is 21 percent. The short-term financial plan would be:
Cash Flow
Q1 Q2 Q3 Q4
Collections from previous quarter $607,500.00 $844,499.33 $874,386.33 $862,125.00
Collections from current quarter
sales 488,920.67 506,223.67 499,125.00 471,617.67
Payments to suppliers for
Cash Balance
Q1 Q2 Q3 Q4
Beginning cash balance $210,000.00 $111,655.50 $245,900.56 $38,895.17
Net cash inflow –98,344.50 134,245.06 –207,005.39 116,810.70
The short-term financial plan looks like this:
Short-term Financial Plan
Target cash balance $135,000.00 $135,000.00 $135,000.00 $135,000.00
Net cash inflow –98,344.50 134,245.06 –207,005.39 116,810.70
New short-term investments 0 –134,620.06 0 –116,829.02
CHAPTER 26 CASE C-7
Beginning short-term investments $75,000.00 $75,000.00 $209,620.06 $3,662.77
The interest calculations for each quarter and the net cash cost are:
Q1: Excess funds at start of quarter of $75,000.00 earns $375.00 in income.
Q2: Excess funds at start of quarter of $75,000.00 earns $375.00 in income.
Net cash cost
Q1 $375.00
Q2 375.00