CHAPTER 18
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. Thus,
5. Since the cash cycle equals the operating cycle minus the accounts payable period, it is not possible
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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
o. Increase. If marketable securities are sold, the company will receive cash from the sale.
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2. The total liabilities and equity of the company are the net book worth, or market value of equity, plus
4. a. Increase; Increase. If the terms of the cash discount are made less favorable to customers, the
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f. Increase; Increase. If more goods are produced for inventory, the inventory period will increase.
This will increase both the cash cycle and operating cycle.
5. a. A 45-day collection period implies all receivables outstanding from the previous quarter are
b. A 60-day collection period implies all receivables outstanding from previous quarter are collected
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c. A 30-day collection period implies all receivables outstanding from previous quarter are collected
6. The operating cycle is the inventory period plus the receivables period. The inventory turnover and
inventory period are:
So, the operating cycle is:
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7. If we factor immediately, we receive cash on an average of 29 days sooner. The number of periods in
a year are:
8. a. The payables period is zero since the company pays immediately. The payment in each period is
30 percent of next period’s sales, so:
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9. Since the payables period is 60 days, the payables in each period will be:
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11. The sales collections each month will be:
12.
Item
Source/Use
Amount
Cash
Accounts payable
Accrued expenses
Accumulated retained earnings
Intermediate
Cash receipts
Cash collections from credit sales
Purchases
Wages, taxes, and expenses
10,800
Total cash disbursements
Ending cash balance
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You will receive your compensating balance back at the end, so the year-end cash flow will be:
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
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Q1
Q2
Q3
Q4
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The company’s cash budget will be:
WILDCAT, INC.
Cash Budget
(in millions)
With a $30 million minimum cash balance, the short-term financial plan will be:
WILDCAT, INC.
Short-Term Financial Plan
(in millions)
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Below you will find the interest paid (or received) for each quarter:
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)
Below you will find the interest paid (or received) for each quarter:
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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)
Below you will find the interest paid (or received) for each quarter:
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.
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Challenge
17. a. For every dollar borrowed, you pay interest of:
b. The EAR is the amount of interest paid on the loan divided by the amount received when the loan
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18. You will pay interest of:
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