1.What would be the probable effect on a firm's cash position of the following events?
a. Rapidly rising sales
b. The payment of payables
c. A more liberal credit policy on sales (to the firm's customers)
d. Holding larger inventories
2. ( Cash budgeting) The Sharpe Corporation's projected sales for the first 8 months of 2006 are as followed:
January $90,000 May $300,000
February 120,000 June 270,000
March 135,000 July 225,000
April 240,000 August 150,000
Of Sharpe's sales 10% is for cash, another 60 percent is collected in the month following sales, and 30% is collected in the second month following sales. November and December sales for 2005 were $220,000 and $175,000, respectively.
Sharpe purchases its raw materials 2 month in advance of its sales equal to 60 percent of their final sales price . The supplier is paid 1 month after it makes delivery. For example, purchases for April sales are made in February, and payments made in March.
In addition, Sharpe pays $10,000 per month for rent and $20,000 each month for other expenditures. Tax repayment of $22,500 are made each quarter, beginning in March.
The company's cash balance on December 31, 2005, was $ 22,000. This is the minimum balance the firm wants to maintain. Any borrowing that is needed to maintain this minimum is paid off in the subsequent month if there is sufficient cash. Interest on short term loans(12 %) is paid monthly. Borrowing to meet estimated monthly cash needs takes place at the beginning of the month. Thus if in the month of April the firm expects to have a need for an additional $60,500, these funds would be borrowed at the beginning of April with interest of $605 (.12 x1/12 x$60,500) owed for April and paid at the beginning of May.
A. Prepare a cash budget for Sharpe covering the first 7 months of 2006.
B. Sharpe has $200,000 in notes payable due in July that must be repaid or negotiated for an extension. Will the firm have ample cash to repay the notes?
3.(Percent of Sales forecasting) Which of the following accounts would most likely vary directly with the level of firm sales? Discuss each briefly.
Yes No Yes No
Cash Notes Payable
Marketable securities Plant and Equipment
Accounts Payable Inventories
4. (Cost of Service) As CFO of Portobello Scuba Diving, Inc. you are asked to look into the possibility of adopting a lockbox system to expedite cash receipts from clients. Portobello receives remittance totaling $24 million by check in a year. The firm records and processes 10,000 checks in the same period. The National bank of brazil had informed you that it could provide the service of expending checks and associated documents through the lockbox system for a unit cost of $0.25 per check. After conducting an analysis, you project that cash freed up by the adoption of the system can be invested in a portfolio of near cash assets that will yield an annual before tax return of 8%. The company usually usues a 365 day year in its producers.
A. What reduction in check collection time is necessary for Portabello to be neither better nor worse off for having adopted the lockbox system?
B. How would your solution to part a be affected if Portobello could invest the freed-up balances at an expected annual return of only 4%?
C. What is the logical explanation for the differences in your answersto part a and b?