CHAPTER18 SHORT-TERM FINANCE AND PLANNING

1. (LO4) a. No change. A dividend paid for by the sale of debt will not change cash since the cash raised from the debt offer goes immediately to shareholders. b. c. d. e. f. g. h. i. j. k. l. m. n. o. No change. The real estate is paid for by the cash raised from the debt, so this will not change the cash balance. No change. Inventory and accounts payable will increase, but neither will impact the cash account. Decrease. The short-term bank loan is repaid with cash, which will reduce the cash balance. Decrease. The payment of taxes is a cash transaction. Decrease. The preferred stock will be repurchased with cash. No change. Accounts receivable will increase, but cash will not increase until the sales are paid off. Decrease. The interest is paid with cash, which will reduce the cash balance. Increase. When payments for previous sales, or accounts receivable, are paid off, the cash balance increases since the payment must be made in cash. Decrease. The accounts payable are reduced through cash payments to suppliers. Decrease. Here the dividend payments are made with cash, which is generally the case. This is different from part a where debt was raised to make the dividend payment. No change. The short-term note will not change the cash balance. Decrease. The utility bills must be paid in cash. Decrease. A cash payment will reduce cash. Increase. If marketable securities are sold, the company will receive cash from the sale.

2.

(LO3) The total liabilities and equity of the company are the net book worth, or market value of equity, plus current liabilities and long-term debt, so: Total liabilities and equity = $10,380 + 1,450 + 7,500 Total liabilities and equity = $19,330 This is also equal to the total assets of the company. Since total assets are the sum of all assets, and cash is an asset, the cash account must be equal to total assets minus all other assets, so: Cash = $19,330 15,190 2,105 Cash = $2,035 We have NWC other than cash, so the total NWC is: NWC = $2,105 + 2,035 NWC = $4,140 We can find total current assets by using the NWC equation. NWC is equal to: NWC = CA CL $4,140 = CA $1,450 CA = $5,590

6.

(LO1) The operating cycle is the inventory period plus the receivables period. The inventory turnover and inventory period are: Inventory turnover = COGS/Average inventory Inventory turnover = $56,384/{[$9,780 + 11,380]/2} Inventory turnover = 5.3293 times Inventory period = 365 days/Inventory turnover Inventory period = 365 days/5.3293 Inventory period = 68.49 days And the receivables turnover and receivables period are: Receivables turnover = Credit sales/Average receivables Receivables turnover = $89,804/{[$4,108 + 4,938]/2} Receivables turnover = 19.8550 times Receivables period = 365 days/Receivables turnover Receivables period = 365 days/19.8550 Receivables period = 18.38 days So, the operating cycle is: Operating cycle = 68.49 days + 18.38 days Operating cycle = 86.87 days The cash cycle is the operating cycle minus the payables period. The payables turnover and payables period are: Payables turnover = COGS/Average payables Payables turnover = $56,384/{[$7,636 + 7,927]/2} Payables turnover = 7.2459 times

Payables period = 365 days/Payables turnover Payables period = 365 days/7.2459 Payables period = 50.37 days So, the cash cycle is: Cash cycle = 86.87 days 50.37 days Cash cycle = 36.50 days The firm is receiving cash on average 36.50 days after it pays its bills. 9. (LO3) Since the payables period is 60 days, the payables in each period will be: Payables each period = 2/3 of last quarters orders + 1/3 of this quarters orders Payables each period = 2/3(.75) times current sales + 1/3(.75) next period sales Q1 Payment of accounts Wages, taxes, other expenses Long-term financing expenses Total $722.50 196.00 90.00 $1,008.50 Q2 $732.50 186.00 90.00 $1,008.50 Q3 $847.50 214.00 90.00 $1,151.50 Q4 $897.50 250.00 90.00 $1,237.50

13. (LO3) a. A 45-day collection period means sales collections each quarter are: Collections = 1/2 current sales + 1/2 old sales A 36-day payables period means payables each quarter are: Payables = 3/5 current orders + 2/5 old orders So, the cash inflows and disbursements each quarter are: Q1 Beginning receivables Sales Collection of accounts Ending receivables Payment of accounts Wages, taxes, and expenses Capital expenditures Interest & dividends Total cash disbursements Total cash collections Total cash disbursements Net cash inflow 12.00 $150.90 $173.00 150.90 $22.10 $68.00 210.00 173.00 $105.00 $86.40 52.50 Q2 $105.00 180.00 195.00 $90.00 $98.55 45.00 80.00 12.00 $235.55 $195.00 235.55 $(40.55) 12.00 $192.95 $212.50 192.95 $19.55 12.00 $197.20 $262.50 197.20 $65.30 Q3 $90.00 245.00 212.50 $122.50 $119.70 61.25 Q4 $122.50 280.00 262.50 $140.00 $115.20 70.00

The companys cash budget will be: WILDCAT, INC. Cash Budget (in millions) !"# $64.00 22.10 $86.10 30.00 $56.10 !$# $86.10 40.55 $45.55 30.00 $15.55 !%# $45.55 19.55 $65.10 30.00 $35.10 !&# $65.10 65.30 $130.40 30.00 $100.40

Beginning cash balance Net cash inflow Ending cash balance Minimum cash balance Cumulative surplus (deficit)

With a $30 million minimum cash balance, the short-term financial plan will be: WILDCAT, INC. Short-Term Financial Plan (in millions) b. Beginning cash balance Net cash inflow New short-term investments Income on short-term investments Short-term investments sold New short-term borrowing Interest on short-term borrowing Short-term borrowing repaid Ending cash balance Minimum cash balance Cumulative surplus (deficit) Beginning short-term investments Ending short-term investments Beginning short-term debt Ending short-term debt ######!"# $30.00 22.10 22.78 0.68 0 0 0 0 $30.00 30.00 $0 $34.00 $56.78 $0 $0 ######!$# $30.00 40.55 0 1.14 39.41 0 0 0 $30.00 30.00 $0 $56.78 $17.37 $0 $0 ######!%# $30.00 19.55 19.90 0.35 0 0 0 0 $30.00 30.00 $0 $17.37 $37.27 $0 $0 ######!&# $30.00 65.30 66.05 0.75 0 0 0 0 $30.00 30.00 $0 $37.27 $103.32 $0 $0

Below you will find the interest paid (or received) for each quarter: Q1: excess funds at start of quarter of $34 invested for 1 quarter earns .02($34) = $0.68 income Q2: excess funds of $56.78 invested for 1 quarter earns .02($56.78) = $1.14 in income Q3: excess funds of $17.37 invested for 1 quarter earns .02($17.37) = $0.35 in income Q4: excess funds of $37.27 invested for 1 quarter earns .02($37.27) = $0.75 in income Net cash cost = $0.68 + 1.14 + 0.35 + 0.75 = $2.92

15. (LO5) a. For every dollar borrowed, you pay interest of: Interest = $1(.019) = $0.019 You also must maintain a compensating balance of 4 percent of the funds borrowed, so for each dollar borrowed, you will only receive: Amount received = $1(1 .04) = $0.96 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: EAR = [(1.019)4 1]/(1 .04) EAR = .08145 or 8.15% Another way to calculate the EAR is using the FVIF (or PVIF). For each dollar borrowed, we must repay: Amount owed = $1(1.019)4 Amount owed = $1.0782 At the end of the year the compensating will be returned, so your net cash flow at the end of the year will be: End of year cash flow = $1.0782 .04 End of year cash flow = $1.0382 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) $1.0382 = $0.96(1 + R) R = $1.0382/$0.96 1 EAR = .08145 or 8.15% 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: Interest = $130,000,000[(1.019)4 1] Interest = $10,165,163.62 For whatever loan amount you take, you will only receive 96 percent of that amount since you must maintain a 4 percent compensating balance on the portion of the credit line used. The credit line also has a fee of .140 percent, so you will only get to use: Amount received = .96($130,000,000) .00140($400,000,000) Amount received = $124,240,000 So, the EAR of the loan is: EAR = $10,165,163.62/$124,240,000 EAR = .08182 or 8.18%