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1 Use the information below for this assignment. Comfin Company has estimates on

ID: 2774617 • Letter: 1

Question

1

Use the information below for this assignment. Comfin Company has estimates on its level of current and total assets for the next two years:

Year 201X

Jan

Feb

Mar

Apr

May

June

July

Aug

Sep

Oct

Nov

Dec

Total Assets

$500,000

$475,000

$460,000

$470,000

$475,000

$485,000

$495,000

$555,000

$600,000

$650,000

$700,000

$750,000

Current Assets

$250,000

$220,000

$199,900

$204,698

$204,392

$208,980

$213,459

$262,829

$307,085

$351,227

$395,251

$439,156

Year 201X + 1

Jan

Feb

Mar

Apr

May

June

July

Aug

Sep

Oct

Nov

Dec

Total Assets

$600,000

$570,000

$552,000

$564,000

$570,000

$582,000

$594,000

$660,000

$720,000

$780,000

$840,000

$900,000

Current Assets

$350,000

$350,000

$352,100

$359,302

$365,608

$373,020

$380,541

$397,171

$412,915

$428,773

$444,749

$460

a. Estimate the levels of permanent and temporary current assets for Comfin over these months. Find the average amount for fixed assets, permanent current assets, and temporary current assets in the year 201X and year 201X + 1.

b. What average amounts of short-term and long-term financing should Comfin have during each year if it wants to follow a maturity-matching financing strategy over time?

c. What average amounts of short-term and long-term financing should Comfin have during each year if it wants to follow an aggressive financing strategy over time?

d. Suppose Comfin’s cost of short-term funds is 8 percent and its cost of long-term funds is 15 percent. Use your answers in (b) and (c) to compute the cost of each strategy.

e. What are the pro and con arguments toward each strategy in terms of profitability, risk, and company liquidity?

Explanation / Answer

a)

Following is the computation of the average of assets for the years 2009 and 2010:

2009 2010 Month Total assets Current assets Total assets Current assets Jan               5,00,000           2,50,000       6,00,000           3,50,000 Feb               4,75,000           2,20,000       5,70,000           3,50,000 Mar               4,60,000           1,99,900       5,52,000           3,52,100 Apr               4,70,000           2,04,698       5,64,000           3,59,302 May               4,75,000           2,04,392       5,70,000           3,65,608 June               4,85,000           2,08,980       5,82,000           3,73,020 Jul               4,95,000           2,13,459       5,94,000           3,80,541 Aug               5,55,000           2,62,829       6,60,000           3,97,171 Sep               6,00,000           3,07,085       7,20,000           4,12,915 Oct               6,50,000           3,51,227       7,80,000           4,28,773 Nov               7,00,000           3,95,251       8,40,000           4,44,749 Dec               7,50,000           4,39,156       9,00,000                   460 Total assets                   66,15,000               32,56,977          79,32,000               42,14,639 Average assets                      5,51,250                 2,71,415            6,61,000                 3,51,220