Assoc. Prof.

Nguyen Viet Dzung

Monte Carlo Simulation - Application

Following are the 2012 balance sheet and income statement for Treamast Corporation

Table 1: Treamast’s balance sheet Unit: USD

ASSETS 2012 2011
Current assets:    
Cash 750,000 750,000
Marketable securities (at cost) 750,000 675,000
Accounts receivable 3,000,000 2,400,000
Inventories 4,500,000 3,000,000
Total current assets 9,000,000 6,825,000
Fixed assets (property, plant, and equipment):    
Land 675,000 675,000
Building 6,000,000 6,000,000
Machinery 2,250,000 1,200,000
Office equipment 75,000 75,000
Less: Accumulated depreciation 3,000,000 2,550,000
Net fixed assets 6,000,000 5,400,000
Prepayments and deferred charges 600,000 450,000
Intangibles 150,000 150,000
Total assets 15,750,000 12,825,000
LIABILITIES AND EQUITY    
Current liabilities:    
Accounts payable 1,500,000 1,125,000
Notes payable 2,250,000 750,000
Accrued expenses payable 375,000 337,500
Taxes payable 375,000 337,500
Total current liabilities 4,500,000 2,550,000
Long-term liabilities:    
Bonds 4,500,000 4,500,000
Deferred taxes 900,000 900,000
Total liabilities 9,900,000 7,950,000
Stockholders’ Equity    
Common stock 2,250,000 2,250,000
Capital surplus 750,000 750,000
Accumulated retained earnings 2,850,000 1,875,000
Total stockholders’ equity 5,850,000 4,875,000
Total liabilities and stockholders’ equity 15,750,000 12,825,000

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 Assoc. Prof. Nguyen Viet Dzung

Table 2: Treamast’s income statement Unit: USD

  2012 2011
Net sales 17,250,000 16,050,000
Cost of sales and operating expenses:    
Cost of goods sold 12,300,000 11,526,000
Depreciation 450,000 412,500
Selling and administration expenses 2,100,000 1,987,500
Operating profit 2,400,000 2,124,000
Other income:    
Dividends and interest 75,000 75,000
Total income from operations 2,475,000 2,199,000
Less: Interest on bonds and other liabilities 450,000 225,000
Income before tax 2,025,000 1,974,000
Income tax 915,000 900,000
Net profit 1,110,000 1,074,000
Dividends paid out 135,000 198,000
Retained earnings 975,000 876,000

Treamast Corporation faces a problem maintaining sufficient cash balances for operations over the next 4 quarters of
2013. Quarterly cash receipts consist of sales collection (depending on accounts receivable period), as well as 2 percent
(per quarter) interest on short-term cash balances. Quarterly cash disbursements consist of COGS (that run about 80
percent of sales) payment (depending on accounts payable period), fixed costs and taxes (see Table 3) as well as interest
and principal repayment for possible loan (see below).
The company enters the year 2013 with the ending cash balance of 2012 and wishes to maintain at least that balance each
quarter in order to cover cash needs. Net sales and COGS for the fourth quarter of 2012 accounted for 25% of the whole
year 2012.
If Treamast Corporation finishes a quarter with less than the ending cash balance of 2012, the company can take out a
one-quarter loan at 3 percent (per quarter) interest. The principal and interest are repaid in the following quarter.
Treamast’s marketing department has made estimates for the mean and standard deviation of sales in each of the next 4
quarters.

Table 3 Unit:USD
Quarterly sales Q1-2013 Q2-2013 Q3-2013 Q4-2013
Mean 5,040,000 4,200,000 5,322,000 7,281,000
Standard deviation 225,000 225,000 279,000 351,000
Fixed costs and taxes 975,000 750,000 1,200,000 1,050,000

REQUIREMENTS

1. Construct a sources-and-uses-of-cash statement for Treamast Corporation

2. Given the uncertainty in sales, how large is Treamast’s maximum quarterly loan likely to be?
3. How likely is Treamast to exceed its current credit limit of $250,000?
4. How much will Treamast have to pay in interest costs for loans?
5. Treamast manages cash using Baumol model. The total amount of new cash needed for 2013 is estimated to be
16,000,000 USD, the fixed cost to raise cash is 1,600 USD and the annual interest rate is 8%. Estimate for each quarter of
2013 the expected amount of cash surplus (to be invested) or deficit (to be financed) in order to keep the firm cash
balance at the optimal level.

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