Wildcat, Inc. has estimated sales (in millions) for the next four quarters as fo
ID: 2792360 • Letter: W
Question
Wildcat, Inc. has estimated sales (in millions) for the next four quarters as follows: Q1 Q2 Q3 Q4 Sales $135 $155 $175 $205 Sales for the first quarter of the year after this one are projected at $150 million. Accounts receivable at the beginning of the year were $59 mllion. Wildcat has a 45 day collection period. Wildcat's purchases from suppliers in a quarter are equal to 40 percent of the next quarter's forecast sales, and suppliers are normally paid in 36 days. Wages, taxes, and other expense run about 20 percent of sales. Interest and dividends are $15 million per quarter. Wildcat plans a major captial outlay in the second quarter of $94 million. Finally, the company started the year with a $72 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 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 Target cash balance $40 $40 $40 $40 Net cash inflow ___ ____ ____ ____ New short-term investments ___ ___ _____ ____ Income on 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) ___ ____ ______ ______ Begining short-term investements ___ ______ _____ _____ Ending short-term investments ___ ____ ____ ______ Begining short-term debt ____ _____ _____ ___ Ending short-term debt ____ ______ ____ ______ a.2. What is the net cash cost 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 minimus cash balance of (Enter your answers in millions. A negative answer should be indicated by a minus sign. Leave no cells blank- enter "0" wherever required. Do not round intermediate calculations and round your answers to 2 decimal place 32.16,) Wildcat, Inc. Short-Term Financial Plan (in millions) Q1 Q2 Q3 Q4 Target cash balance $20 $20 $20 $20 Net cash inflow ____ ____ _____ ______ New short-term investments _____ _____ ____ _____ Income on short-term investments ____ _____ ______ _______ Short-term investment 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 for the year under this target cash balance? (Enter your answer in millions. A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g. 32.16.) Net cash cost $_______
Explanation / Answer
Net cash movement without working capital changes
creditor holding days= 36 = trade creditors/ cost of purchases *365
trade creditors= creditor holding days*cost of purchases/365= 36*62/365
Trade creditors at end of quarter 1= 6.12
similarly,
receivable holding days= receivables/sales*365
receivables= receivable holding days* sales/365= 45*135/365= 16.64
working capital gap = receivables- payables=16.64-6.12=10.52
This gap will deplete our cash flow as the money is yet to be received from the customer
Now, this working capital gap will keep on increasing with increase in sales as customers enjoy more credit period than what the company enjoys from its suppliers
Working capital movement during quarter 2
trade creditors= creditor holding days*cost of purchases/365= 36*70/365
Additional Trade creditors at end of quarter = 6.90
similarly,
receivable holding days= receivables/sales*365
receivables= receivable holding days* sales/365= 45*155/365= 19.11
working capital gap = receivables- payables=19.11-6.90=12.21
total working capital gap at end of second quarter=10.52+12.21=22.73
Working capital movement during quarter 3
trade creditors= creditor holding days*cost of purchases/365= 36*82/365
Additional trade creditors= 8.09
similarly,
receivable holding days= receivables/sales*365
receivables= receivable holding days* sales/365= 45*175/365= 21.57
working capital gap = receivables- payables=21.57-8.09=13.48
total working capital gap at end of third quarter=10.52+12.21+13.48=36.21
Working capital movement during quarter 4
trade creditors= creditor holding days*cost of purchases/365= 36*60/365
Additional trade creditors= 5.92
similarly,
receivable holding days= receivables/sales*365
receivables= receivable holding days* sales/365= 45*205/365= 25.27
working capital gap = receivables- payables=25.27-5.92=19.35
total working capital gap at end of fourth quarter=10.52+12.21+13.48+19.35=55.56
Now we are given two things, first is that we need to maintain min balance of $40 million
now since we are surplus when it comes to cash at the beginning of the year at $ 72 million and there was a positive cash movement during 1st quarter of $20.48 million, we can invest the surplus cash (above $ 40 million) at 2% interest over next quarter to get interest income of 2%*(92.48-40)=1.05 , therefore net cash balance at the end of second quarter = 72+20.48+1.05-77.73= $15.8million, now excess deficit of ($40-$15.8) million can be borrowed again at 3% over next quarter to get interest expense of 3% *24.2=0.726 million, thus , net cash balance at the end of third quarter=15.8-0.726+6.79=21.86,now this excess deficit of ($ 21.86-$ 40) million can again be borrowed at 3% over next quarter to get interest expense of 3%*18.14= 0.5442, thus, net cash balance at the end of fourth quarter= 21.86-0.5442+33.44=54.75,note that borrowing in each quarter is paid back at the end of that quarter
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Particular quarter 1 quarter 2 quarter 3 quarter 4 Sales 135 155 175 205 purchases 40% of next quarter sales 62 70 82 60 wages taxes and other expenses-20% of sales 27 31 35 41 interest and dividend -15 million per quarter 15 15 15 15 capex 94Net cash movement without working capital changes
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