CHAPTER 26 –
CHAPTER 26
SHORT-TERM FINANCE AND PLANNING
Answers to Concepts Review and Critical Thinking Questions
1. These are firms with relatively long inventory periods and/or relatively long receivables periods.
2. These are firms that have a relatively long time between the time that purchased inventory is paid for
3. a. Use: The cash balance declined by $200 to pay the dividend.
b. Source: The cash balance increased by $500, assuming the goods bought on payables credit
were sold for cash.
4. Carrying costs will decrease because they are not holding goods in inventory. Shortage costs will
5. Since the cash cycle equals the operating cycle minus the accounts payable period, it is not possible
for the cash cycle to be longer than the operating cycle if the accounts payable is positive. Moreover,
6. Shortage costs are those costs incurred by a firm when its investment in current assets is low. There
are two basic types of shortage costs. 1) Trading or order costs. Order costs are the costs of placing
7. A long-term growth trend in sales will require some permanent investment in current assets. Thus, in
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10. It is sometimes argued that large firms “take advantage of” smaller firms by threatening to take their
11. They would like to! The payables period is a subject of much negotiation, and it is one aspect of the
price a firm pays its suppliers. A firm will generally negotiate the best possible combination of
12. BlueSky will need less financing because it is essentially borrowing more from its suppliers. Among
Solutions to Questions and Problems
NOTE: All end-of-chapter problems were solved using a spreadsheet. Many problems require multiple
steps. Due to space and readability constraints, when these intermediate steps are included in this
solutions manual, rounding may appear to have occurred. However, the final answer for each problem is
found without rounding during any step in the problem.
Basic
1. a. No change. A dividend paid for by the sale of debt will not change cash since the cash raised
b. No change. The real estate is paid for by the cash raised from the debt, so this will not change
f. Decrease. The preferred stock will be repurchased with cash.
h. Decrease. The interest is paid with cash, which will reduce the cash balance.
i. Increase. When payments for previous sales, or accounts receivable, are paid off, the cash
k. Decrease. Here the dividend payments are made with cash, which is generally the case. This is
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2. The total liabilities and equity of the company are the book value of equity, plus current liabilities
and long-term debt, so:
We have NWC other than cash. Since NWC is current assets minus current liabilities, NWC other
than cash is:
NWC other than cash = Accounts receivable + Inventory – Current liabilities
Since total assets must equal total liabilities and equity, we can solve for cash as:
Cash = Total assets – Fixed assets – (Accounts receivable + Inventory)
So, the current assets are:
3. a. Increase. If receivables go up, the time to collect the receivables would increase, which
b. Increase. If credit repayment times are increased, customers will take longer to pay their bills,
f. No change. Payments to suppliers affect the accounts payable period, which is part of the cash
4. a. Increase; Increase. If the terms of the cash discount are made less favorable to customers, the
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b. Increase; No change. This will shorten the accounts payable period, which will increase the
c. Decrease; Decrease. If more customers pay in cash, the accounts receivable period will
d. Decrease; Decrease. Assume the accounts payable period and inventory period do not change.
e. Decrease; No change. If more raw materials are purchased on credit, the accounts payable
period will tend to increase, which would decrease the cash cycle. We should say that this may
not be the case. The accounts payable period is a decision made by the company’s management.
f. Increase; Increase. If more goods are produced for inventory, the inventory period will increase.
5. a. A 45-day collection period implies all receivables outstanding from the previous quarter are
Q1 Q2 Q3 Q4
Beginning receivables $335.00 $370.00 $420.00 $455.00
b. A 60-day collection period implies all receivables outstanding from the previous quarter are
collected in the current quarter, and:
(90 – 60)/90 = 1/3 of current sales are collected. So:
Q1 Q2 Q3 Q4
Beginning receivables $335.00 $493.33 $560.00 $606.67
c. A 30-day collection period implies all receivables outstanding from the previous quarter are
collected in the current quarter, and:
(90 – 30)/90 = 2/3 of current sales are collected. So:
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Q1 Q2 Q3 Q4
Beginning receivables $335.00 $246.67 $280.00 $303.33
6. The operating cycle is the inventory period plus the receivables period. The inventory turnover and
inventory period are:
Inventory turnover = COGS / Average inventory
Inventory period = 365 days / Inventory turnover
And the receivables turnover and receivables period are:
Receivables turnover = Credit sales / Average receivables
Receivables period = 365 days / Receivables turnover
So, the operating cycle is:
The cash cycle is the operating cycle minus the payables period. The payables turnover and payables
period are:
Payables turnover = COGS / Average payables
Payables period = 365 days / Payables turnover
So, the cash cycle is:
The firm is receiving cash on average 27.78 days after it pays its bills.
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7. a. The payables period is zero since the company pays immediately. Sales in the year following
this one are projected to be 15 percent greater in each quarter. Therefore, Q1 sales for the next
b. Since the payables period is 90 days, the payment in each period is 30 percent of the current
period sales, so:
Q1 Q2 Q3 Q4
c. Since the payables period is 60 days, the payment in each period is 2/3 of last quarter’s orders,
plus 1/3 of this quarter’s orders, or:
Quarterly payments = 2/3(.30) times current sales + 1/3(.30) next period sales
8. Since the payables period is 60 days, the payables in each period will be:
Q1 Q2 Q3 Q4
Payment of accounts $1,137.50
$1,220.0
0 $1,080.00 $1,051.25
Wages, taxes, other expenses 287.00 336.00 304.00 256.00
9. 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:
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c. The collections each month for this company are:
Collections = .15(Sales from 2 months ago) + .20(Last month’s sales) + .65(Current sales)
February collections = .15($250,714.29) + .20($258,000) + .65($274,200)
February collections = $267,437.14
10. The sales collections each month will be:
Sales collections = .35(current month sales) + .60(previous month sales)
Given this collection, the cash budget will be:
April May June
Beginning cash balance $443,500 $394,227 $503,450
Cash receipts
Cash disbursements
Purchases 247,100 232,850 277,900
Wages, taxes, and expenses 62,964 76,364 79,670
11. Item Source/Use Amount
Cash Source $2,365
Accounts payable Use –$22,126
Accrued expenses Use –$1,140
Intermediate
12. First, we need to calculate the sales from the last quarter of the previous year. Since 50 percent of the
sales were collected in that quarter, the sales figure must have been:
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Now we can estimate the sales growth each quarter, and calculate the net sales including the seasonal
adjustments. The sales figures for each quarter will be:
Quarter 1 Quarter 2 Quarter 4 Quarter 4
Since 50 percent of sales are collected in the quarter the sales are made, and 45 percent of sales are
collected in the quarter after the sales are made, the cash budget is:
Quarter 1 Quarter 2 Quarter 4 Quarter 4
Collected within
13. a. A 45-day collection period means sales collections each quarter are:
Collections = 1/2 current sales + 1/2 old sales
So, the cash inflows and disbursements each quarter are:
Q1 Q2 Q3 Q4
Beginning receivables $34.00 $52.50 $45.00 $61.00
Payment of accounts $43.20 $49.14 $59.76 $57.60
Total cash collections $86.50 $97.50 $106.00 $131.00
Total cash disbursements 80.70 122.14 102.36 105.60
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The company’s cash budget will be:
WILDCAT, INC.
Cash Budget
(in millions)
Q1 Q2 Q3 Q4
Beginning cash balance $32.00 $37.80 $13.16 $16.80
Net cash inflow 5.80 –24.64 3.64 25.40
With a $15 million minimum cash balance, the short-term financial plan will be:
WILDCAT, INC.
Short-Term Financial Plan
(in millions)
b. Q1 Q2 Q3 Q4
Beginning cash balance $15.00 $15.00 $15.00 $15.00
Net cash inflow 5.80 –24.64 3.64 25.40
New short-term investments –6.14 0 –2.57 –25.45
Beginning short-term investments $17.00 $23.14 $0 $2.57
Ending short-term investments $23.14 $0 $2.57 $28.07
Below you will find the interest paid (or received) for each quarter:
Q1: excess funds at start of quarter of $17 invested for 1 quarter earns .02($17) = $.34 income
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14. a. 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
Beginning cash balance $20.00 $20.00 $20.00 $20.00
Net cash inflow 5.80 –24.64 3.64 25.40
New short-term investments –6.04 0 0 –22.53
Income on short-term investments .24 .36 0 0
Beginning short-term investments $12.00 $18.04 $0 $0
Ending short-term investments $18.04 $0 $0 $22.53
Below you will find the interest paid (or received) for each quarter:
Q1: excess funds at start of quarter of $12 invested for 1 quarter earns .02($12) = $.24 income
b. And with a minimum cash balance of $10 million, the short-term financial plan will be:
WILDCAT, INC.
Short-Term Financial Plan
(in millions
Q1 Q2 Q3 Q4
Beginning cash balance $10.00 $10.00 $10.00 $10.00
Net cash inflow 5.80 –24.64 3.64 25.40
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New short-term borrowing 0 0 0 0
Interest on short-term borrowing 0 0 0 0
Short-term borrowing repaid 0 0 0 0
Beginning short-term investments $22.00 $28.24 $4.16 $7.89
Ending short-term investments $28.24 $4.16 $7.89 $33.60
Below you will find the interest paid (or received) for each quarter:
Q1: excess funds at start of quarter of $22 invested for 1 quarter earns .02($22) = $.44 income
Q2: excess funds of $28.24 invested for 1 quarter earns .02($28.24) = $.56 in income
Since cash has an opportunity cost, the firm can boost its profit if it keeps its minimum cash balance
15. a. The current assets of Cleveland Compressor are financed largely by retained earnings. From
2015 to 2016, total current assets grew by $7,212. Only $2,126 of this increase was financed by
b. Cleveland Compressor holds the larger investment in current assets. It has current assets of
c. Cleveland Compressor is more likely to incur shortage costs because the ratio of current assets
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