P14-4 Aggressive versus conservative seasonal funding strategy Dynabase Tool has
ID: 2800603 • Letter: P
Question
P14-4 Aggressive versus conservative seasonal funding strategy Dynabase Tool has fore- cast its total funds requirements for the coming year as shown in the following tabl e. Month Amount Month Amount January$2,000,000 February 2,000,000 March April May 2,000,000 4,000,000 6,000,000 9,000,000 July August September October November December $12,000,000 14,000,000 9,000,000 5,000,000 4,000,000 3,000,000 une a. Divide the firm's monthly funds requirement into (1) a permanent component and (2) a seasonal component, and find the monthly average for each of these components. Describe the amount of long-term and short-term financing used to meet the to- tal funds requirement under (1) an aggressive funding strategy and (2) a conser- vative funding strategy. Assume that, under the aggressive strategy, long-term funds finance permanent needs and short-term funds are used to finance seasonal needs. Assuming that short-term funds cost 5% annually and that the cost of long-term funds is 10% annually, use the averages found in part a to calculate the total cost of each of the strategies described in part b. Assume that the firm can earn 3% on any excess cash balances. b. c. the profitability-risk trade-offs associated with the aggressive strategy d. Discuss and those associated with the conservative strategy.Explanation / Answer
a) Amount in ML
B) Agressive Funding strategy ( Use short term fund for long term investment )
Long Term - 2 Ml Short term - Upto 12 ML
Conservative Funding strategy
Long term - 6 Ml ( Avg. requirement including seasonal ) Short term - Upto 8 M
C) Interest cost
Agressive Funding strategy
Conservative Funding strategy
D) Aggressive strategy is less costly. However, availability of large short term fund is more risky as interest rates can change and funds avaialibity may be scarce.
Conservative straegy is more costly. However, it minimizes risk of avaialbility of fund.
Total Requirement Permanent Component Seasonal Componenet Jan 2 2 0 Feb 2 2 0 Mar 2 2 0 Apr 4 2 2 May 6 2 4 Jun 9 2 7 Jul 12 2 10 Aug 14 2 12 Sep 9 2 7 Oct 5 2 3 Nov 4 2 2 Dec 3 2 1 Total 72 24 48 AVG 6 2 4Related Questions
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