Question

Wildcat, Inc., has estimated sales (in millions) for the next four quarters as follows: Q1 Q2 Q3 Q4 Sales $ 180 $ 200 $ 220 $ 250 Sales for the first quarter of the year after this one are projected at $195 million. Accounts receivable at the beginning of the year were $77 million. Wildcat has a 45-day collection period. Wildcat’s purchases from suppliers in a quarter are equal to 50 percent of the next quarter’s forecasted sales, and suppliers are normally paid in 36 days. Wages, taxes, and other expenses run about 25 percent of sales. Interest and dividends are $10 million per quarter. Wildcat plans a major capital outlay in the second quarter of $85 million. Finally, the company started the year with a $81 million cash balance and wishes to maintain a $40 million minimum balance. a-1. Assume that Wildcat can borrow any needed funds on a short-term basis at a rate of 3 percent per quarter and can invest any excess funds in short-term marketable securities at a rate of 2 percent per quarter. Complete the following short-term financial plan for Wildcat. (Enter your answers in millions. A negative answer should be indicated by a minus sign. Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) WILDCAT, INC. Short-Term Financial Plan (in millions) Q1 Q2 Q3 Q4 Beginning cash balance $ 40.00 $ 40.00 $ 40.00 $ 40.00 Net cash inflow 16 New short-term investments 17 Income from short-term investments 1 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 $ $ $ $ a-2. What is the net cash cost (total interest paid minus total investment income earned) for the year under this target cash balance? (A negative answer should be indicated by a minus sign. Enter your answer in millions. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Net cash cost $ b-1. Complete the following short-term financial plan assuming that Wildcat maintains a minimum cash balance of $20 million. (Enter your answers in millions. A negative answer should be indicated by a minus sign. Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) WILDCAT, INC. Short-Term Financial Plan (in millions) Q1 Q2 Q3 Q4 Minimum cash balance $ 20.00 $ 20.00 $ 20.00 $ 20.00 Net cash inflow New short-term investments Income from 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 $ $ $ $ b-2. What is the net cash cost (total interest paid minus total investment income earned) for the year under this target cash balance? (A negative answer should be indicated by a minus sign. Enter your answer in millions. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Net cash cost $

Answer 1

a-1. To complete the short-term financial plan for Wildcat, we need to calculate the net cash inflow for each quarter. The net cash inflow is calculated by subtracting the cash outflows (purchases from suppliers, wages, taxes, expenses, interest, and dividends) from the sales for each quarter.

For Q1:
Sales: $180 million
Cash outflows: 50% of Q2 sales ($200 million) for purchases from suppliers = $100 million
Wages, taxes, and expenses: 25% of sales = $45 million
Interest and dividends: $10 million
Net cash inflow for Q1: $180 million - $100 million - $45 million - $10 million = $25 million

For Q2:
Sales: $200 million
Cash outflows: 50% of Q3 sales ($220 million) for purchases from suppliers = $110 million
Wages, taxes, and expenses: 25% of sales = $50 million
Interest and dividends: $10 million
Capital outlay: $85 million
Net cash inflow for Q2: $200 million - $110 million - $50 million - $10 million - $85 million = -$55 million

For Q3:
Sales: $220 million
Cash outflows: 50% of Q4 sales ($250 million) for purchases from suppliers = $125 million
Wages, taxes, and expenses: 25% of sales = $55 million
Interest and dividends: $10 million
Net cash inflow for Q3: $220 million - $125 million - $55 million - $10 million = $30 million

For Q4:
Sales: $250 million
Cash outflows: None (as there are no purchases from suppliers in the next quarter)
Wages, taxes, and expenses: 25% of sales = $62.5 million
Interest and dividends: $10 million
Net cash inflow for Q4: $250 million - $62.5 million - $10 million = $177.5 million

The complete short-term financial plan for Wildcat is as follows:
Q1: Beginning cash balance = $40 million
Net cash inflow = $25 million
New short-term investments = $0
Income from short-term investments = $0
Short-term investments sold = $0
New short-term borrowing = $0
Interest on short-term borrowing = $0
Short-term borrowing repaid = $0
Ending cash balance = $40 million + $25 million = $65 million
Minimum cash balance = $40 million
Cumulative surplus (deficit) = $25 million - $0 - $0 - $0 = $25 million
Beginning short-term investments = $0
Ending short-term investments = $0
Beginning short-term debt = $0
Ending short-term debt = $0

Q2: Beginning cash balance = $65 million
Net cash inflow = -$55 million
New short-term investments = $0
Income from short-term investments = $0
Short-term investments sold = $0
New short-term borrowing = $0
Interest on short-term borrowing = $0
Short-term borrowing repaid = $0
Ending cash balance = $65 million - $55 million = $10 million
Minimum cash balance = $40 million
Cumulative surplus (deficit) = -$55 million - $0 - $0 - $0 = -$55 million
Beginning short-term investments = $0
Ending short-term investments = $0
Beginning short-term debt = $0
Ending short-term debt = $0

Q3: Beginning cash balance = $10 million
Net cash inflow = $30 million
New short-term investments = $0
Income from short-term investments = $0
Short-term investments sold = $0
New short-term borrowing = $0
Interest on short-term borrowing = $0
Short-term borrowing repaid = $0
Ending cash balance = $10 million + $30 million = $40 million
Minimum cash balance = $40 million
Cumulative surplus (deficit) = $30 million - $0 - $0 - $0 = $30 million
Beginning short-term investments = $0
Ending short-term investments = $0
Beginning short-term debt = $0
Ending short-term debt = $0

Q4: Beginning cash balance = $40 million
Net cash inflow = $177.5 million
New short-term investments = $0
Income from short-term investments = $0
Short-term investments sold = $0
New short-term borrowing = $0
Interest on short-term borrowing = $0
Short-term borrowing repaid = $0
Ending cash balance = $40 million + $177.5 million = $217.5 million
Minimum cash balance = $40 million
Cumulative surplus (deficit) = $177.5 million - $0 - $0 - $0 = $177.5 million
Beginning short-term investments = $0
Ending short-term investments = $0
Beginning short-term debt = $0
Ending short-term debt = $0

a-2. To calculate the net cash cost for the year under this target cash balance, we need to subtract the total investment income earned from the total interest paid.

Total investment income earned = Income from short-term investments for Q1 + Q2 + Q3 + Q4 = $0
Total interest paid = Interest on short-term borrowing for Q1 + Q2 + Q3 + Q4 = $0

Net cash cost = Total interest paid - Total investment income earned = $0 - $0 = $0 million

b-1. To complete the short-term financial plan assuming a minimum cash balance of $20 million, we need to follow the same steps as in part a-1, but with the minimum cash balance set at $20 million.

b-2. To calculate the net cash cost for the year under this target cash balance, we need to subtract the total investment income earned from the total interest paid, as in part a-2. However, since the interest rate and investment rate remain the same, the net cash cost will still be $0 million.