15. a. A 45-day collection period means sales collections each quarter are:
A 36-day payables period means payables each quarter are:
So, the cash inflows and disbursements each quarter are:
Q1 Q2 Q3 Q4
Beginning receivables $71.00 $85.00 $92.50 $100.00
Payment of accounts $80.55 $87.30 $96.75 $89.10
Wages, taxes, and expenses 42.50 46.25 50.00 56.25
Total cash collections $156.00 $177.50 $192.50 $212.50
The company’s cash budget will be:
WILDCAT, INC.
Cash Budget
(in millions)
Q1 Q2 Q3 Q4
Beginning cash balance $54.00 $72.95 $17.90 $49.65
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 18.95 –55.05 31.75 53.15
New short-term investments –19.43 0 –20.68 –53.56
Beginning short-term investments $24.00 $43.43 $0 $20.68
Below you will find the interest paid (or received) for each quarter:
Q1: excess funds of $24 invested for one quarter earns .02($24) = $.48 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 18.95 –55.05 31.75 53.15
New short-term investments –19.23 0 –9.96 –53.35
Income on short-term investments .28 .66 0 .20
Below you will find the interest paid (or received) for each quarter:
Q1: excess funds of $14 invested for one quarter earns .02($14) = $.28 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 18.95 –55.05 31.75 53.15
New short-term investments –19.63 0 –31.39 –53.78
Beginning short-term investments $34.00 $53.63 $0 $31.39
Below you will find the interest paid (or received) for each quarter:
Q1: excess funds of $34 invested for one quarter earns .02($34) = $.68 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 balance 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: