Corporate Finance
12th Edition
ISBN: 9781259918940
Author: Ross, Stephen A.
Publisher: Mcgraw-hill Education,
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Chapter 26, Problem 3MC
Rework the sales budget assuming an 11 percent growth rate in sales and a 5 percent growth rate in sales. Assume a $135,000 target cash balance.
KEAFER MANUFACTURING
WORKING CAPITAL MANAGEMENT
You have recently been hired by Keafer Manufacturing to work in its established treasury department. Keafer Manufacturing is a small company that produces highly customized cardboard boxes in a variety of sizes for different purchasers. Adam Keafer, the owner of the company, works primarily in the sales and production areas of the company. Currently, the company basically puts all receivables in one pile and all payables in another, and a part-lime bookkeeper periodically comes in and attacks the piles. Because of this disorganized system, the finance area needs work, and that's what you've been brought in to do.
The company currently has a cash balance of $210,000, and it plans to purchase new machinery in the third quarter at a cost of 5390,000. The purchase of the machinery will be made with cash because of the discount offered for a cash purchase. Adam wants to maintain a minimum cash balance of $135,000 to guard against unforeseen contingencies. All of Keafer’s sales to customers and purchases from suppliers are made with credit, and no discounts are offered or taken.
The company had the following sales each quarter of the year just ended:
After some research and discussions with customers, you’re projecting that sales will be 8 percent higher in each quarter next year. Sales for the first quarter of the following year are also expected to grow at 8 percent. You calculate that Keafer currently has an accounts receivable period of 57 days and an accounts receivable balance of $675,000. However, 10 percent of the accounts receivable balance is from a company that has just entered bankruptcy, and it is likely that this portion will never be collected.
You’ve also calculated that Keafer typically orders supplies each quarter in the amount of 50 percent of the next quarter’s projected gross sales, and suppliers are paid in 53 days on average. Wages, taxes, and other costs run about 25 percent of gross sales. The company has a quarterly interest payment of $185,000 on its long-term debt. Finally, the company uses a local bank for its short-term financial needs. It currently pays 1.2 percent per quarter on all short-term borrowing and maintains a
Adam has asked you to prepare a cash budget and short-term financial plan for the company under the current policies. He has also asked you to prepare additional plans based on changes in several inputs.
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Students have asked these similar questions
(Short-Term Finance and Planning)
You are hired as a financial manager and your first task is to establish the cash budget of your firm.
You gathered the following information.
The firm receives all income from sales
Sales estimates (in millions)
Q1 = 1,000; Q2 = 1,250; Q3 = 1,500; Q4 = 2,000; Q1 next year = 1,200
Accounts receivable
Beginning receivables = $3000
Average collection period = 45 days
Accounts payable
Purchases = 60% of next quarter’s sales
Beginning payables = 1,200
Accounts payable period is 45 days
Other expenses
Wages, taxes, and other expense are 25% of sales
Interest and dividend payments are $100
A major capital expenditure of $500 is expected in the second quarter
The initial cash balance is $100 and the company maintains a minimum balance of $50
You are hired as a financial manager and your first task is to establish the cash budget of your firm.You gathered the following information:
The firm receives all income from sales•Sales estimates (in millions)* Quarter1 = 1,000; Quarter2 = 1,250; Quarter3 = 1,500; Quarter4 = 2,000; Quarter1 next year = 1,200• Accounts receivable* Beginning receivables = $3000* Average collection period = 45 days• Accounts payable* Purchases = 60% of next quarter’s sales* Beginning payables = 1,200* Accounts payable period is 45 days• Other expenses*Wages, taxes, and other expense are 25% of sales*Interest and dividend payments are $100*A major capital expenditure of $500 is expected in the second quarter•The initial cash balance is $100 and the company maintains a minimum balance of $50
You are hired as a financial manager and your first task is to establish the cash budget of your firm.You gathered the following information.
The firm receives all income from sales•Sales estimates (in millions)* Quarter1 = 1,000; Quarter2 = 1,250; Quarter3 = 1,500; Quarter4 = 2,000; Quarter1 next year = 1,200• Accounts receivable* Beginning receivables = $3000* Average collection period = 45 days• Accounts payable* Purchases = 60% of next quarter’s sales* Beginning payables = 1,200* Accounts payable period is 45 days• Other expenses*Wages, taxes, and other expense are 25% of sales*Interest and dividend payments are $100*A major capital expenditure of $500 is expected in the second quarter•The initial cash balance is $100 and the company maintains a minimum balance of $50
1) Required: establish the cash budget of the firm.
Chapter 26 Solutions
Corporate Finance
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