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ANSWER KEY

MODULE 9

1. Computing Payments
Purchase in current quarter = 75% of next quarter forecast
Sales for Q1 in next year = $1,090
Payable period = 60 days = 2/3 of purchase in current quarter
Beginning payables = 1/3 of purchase from quarter before
To find payment of accounts:
Q0 Q1 Q2 Q3 Q4
Purchases 735 697.5 802.5 937.5 817.5
2/3 of purchases 490 465 535 625 545
Beginning payables 245 232.5 267.5 312.5
Payment of accounts 710 767.5 892.5 857.5
Wages = 20% of sales
Interest and dividend = $90
To calculate the company’s cash outlays:
Q1 Q2 Q3 Q4
Payment of accounts 710 767.5 892.5 857.5
Wages, taxes, and other expenses 196 186 214 250
Long-term financing expenses 90 90 90 90
Total $996 $1,043.5 $1,196.5 $1,197.5

2. Calculating Cash Collections
a. Sales for November = (173,000 – 136,000) / 0.15 = $246,666.67
b. Sales for December = 136,000 / 0.35 = $388,571.43
c. Cash collections from sales
January = (0.65 x 235,000) + (0.20 x 388,571.43) + (0.15 x 246,666.67) = $267,464.29
February = (0.65 x 260,000) + (0.20 x 235,000) + (0.15 x 388,571.43) = $274,285.71
March = (0.65 x 295,000) + (0.20 x 260,000) + (0.15 x 235,000) = $279,000

3. Cost of Borrowing
a. EAR = (1 + 0.012)
4
– 1 = 4.89%
b. EAR = 9.63%
c. EAR = 9.52%


4. Calculating the Cash Budget
a. Average collection period is 45 days, half of the sales will be collected in the quarter of
purchase while remaining half will be collected in next quarter.
Beginning accounts receivables of Q1 = $68 million
Cash collection of current quarter = ½ of sales in current quarter + beginning receivables in
current quarter or ½ of sales from quarter before
Q1 Q2 Q3 Q4
Total cash collections $173.00 $195.00 $212.50 $262.50
Purchases = 45% of next quarter sales.
Sales in Q1 of the year after = $240 million
Accounts payable period is 36 days, 0.4 of the purchases will be paid in the quarter of purchase
while remaining 0.6 will be paid in next quarter.
Cash payments for purchases = 0.4 of purchase in current quarter + 0.6 of purchase from
quarter before
Q0 Q1 Q2 Q3 Q4
Purchases 94.5 81 110.25 126 108
0.4 of purchases 32.4 44.1 50.4 43.2
Beginning payables 56.7 48.6 66.15 75.6
Cash payments for purchases $89.10 $92.70 $116.55 $118.80
Capital expenditure in Q2 = $80 million
Wages, taxes, and other costs = 25% of sales
Interest and dividends = $12 million
Total cash disbursements = cash payments + wages, taxes, and other costs + capital
expenditure
Q1 Q2 Q3 Q4
Cash payments for purchases 89.1 92.7 116.55 118.8
Wages, taxes, and other expenses 52.5 45 61.25 70
Long-term financing expenses 12 12 12 12
Capital expenditure 80
Total cash disbursements $153.60 $229.70 $189.80 $200.80
Net cash inflow (outflow) = total cash collections – total cash disbursement
Ending cash balance in current quarter = beginning cash balance in current quarter + net cash
inflow (outflow) in current quarter
Beginning cash balance = ending cash balance from quarter before
Cumulative surplus (deficit) = ending cash balance – minimum cash balance




WILDCAT, INC.
Cash Budget
(in millions)
Q1 Q2 Q3 Q4
Target cash balance 30 49.4 14.7 37.4
Net cash inflow (outflow) 19.4 -34.7 22.7 61.7
Ending cash balance 49.4 14.7 37.4 99.1
Minimum cash balance 30 30 30 30
Cumulative surplus (deficit) $19.4 -$15.3 $7.4 $69.1
b. Interest rate on short term borrowing = 3% per quarter
Interest rate on short term investment = 2%
WILDCAT, INC.
Cash Budget (in millions)
Q1 Q2 Q3 Q4
Target cash balance 64 60.0 30.0 47.9
Net cash inflow 19.4 -34.7 22.7 61.7
New short-term investments -23.4
Income from short-term investment 1.43
Short-term investments sold 23.4
New short-term borrowing 4.7
Short-term borrowing repaid -4.84
Ending cash balance 60.0 30.0 47.9 134.4
Minimum cash balance 30 30 30 30
Cumulative surplus (deficit) 30.0 0.0 17.9 104.4
Beginning short-term investments 23.87 24.34 24.80
Ending short-term investments 23.4 24.34 24.80 1.43
Beginning short-term debt 4.7
Ending short-term debt 4.7 -0.14
Net cash cost = total interest paid – total investment income
Net cash cost = 0.14 – 1.43 = -$1.29 million