Question

15. Calculating the Cash Budget (L03) Cottonwood Inc. has estimated sales (in millions) for the next four quarters as follows: Q1 Q2 03 04 $160 $175 $190 $215 Click here for a description of Table: Questions and Problems 15. Sales for the first quarter of the year after this one are projected at $170 million. Accounts receivable at the beginning of the year were $68 million. Cottonwood has a 45 day collection period Cottonwood's purchases from suppliers in a quarter are equal to 45 percent of the next quarter's forecast sales, and suppliers are normally paid in 36 days. Wages, taxes, and other expenses run about 25 percent of sales. Interest and dividends are $12 million per quarter Cottonwood plans a major capital outlay in the second quarter of $75 million. Finally, the company started the year with a $49 million cash balance and wishes to maintain a $30 million minimum balance. a. Complete a cash budget for Cottonwood by filling in the following: 549 COTTONWOOD INC. Cash Budget fin $ millions) Q1 Q2 03 04 Beginning cash balance Net cash inflow Ending cash balance Minimum cash balance Cumulative surplus (deficit) Click here for a description of Table Questions and Problems 15a. b. Assume that Cottonwood 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. Prepare a short-term financial plan by filling in the following schedule. What is the net cash cost (total interest paid minus total investment income earned) for the year?

Answer 1

As per the scenario provided

Part I

				All figs in $Mn
	Working	Formula	Opening	Q1	Q2	Q3	Q4	Q1
	Sales			160	175	190	215	170
	Account Receivable(AR)	45 days outstanding or 50% of Qtr Sales	68	80	88	95	108
	Purchase(% of next Qtr Sales)	45% of next qtr Sales	45%	79	86	97	77
	Account Payable(AP)	45% of Q1 sales/90 days*36 days	29	32	34	39	31
	Vendor Payout( @ 36 days )	Opening AP + Purchase - Closing AP	36	76	83	92	85
	Wages, Taxes(% of Sales)	25% of Qtr sales	25%	40	44	48	54
	Interest & Dividend	As provided	12/Qtr	12	12	12	12
	Cash Budget
Part a	Beginning Cash Balance		a	49	69	23	54	106
	AR Collection	Opening AR +Qtr Sales- Closing AR	b	148	168	183	203
	AP Payment	Opening AP + Purchase - Closing AP	c	-76	-83	-92	-85
	Wages, Taxes	As per above table	d	-40	-44	-48	-54
	Interest Dividend	As per above table	e	-12	-12	-12	-12
	Net Cash inflow	b+c+d+e	f	20	29	31	52
	Capital Outlay		g		-75
	Ending Cash flow	a+f+g	h	69	23	54	106
	Min Cash Balance		i	30	30	30	30
	Cum. surplus(Deficit)	h-i	j	39	-7	24	76

				All figs in $Mn
	Working	Formula	Opening	Q1	Q2	Q3	Q4
Part b	Beginning Cash Balance		a	30	30	30	30
	Net Cash inflow	b+c+d+e	f	20	29	31	52
	Ending Cash flow	a+f+g	h	50	-16	61	82
	Min Cash Balance		i	30	30	30	30
	Cum. surplus(Deficit)	h-i	j	20	-46	31	52
	New Short term Invest		k	20		5	52
	Interest/(cost)	2% on Investment & 3% on Borrowing	l	-	0.4	-0.8	0.1
	Short term Invest Sold		m		20
	Short term Borrowing		n		26
	Short term Borrowing Repaid		o			26
	Beginning Short term Investment	q of previous qtr	p	-	20.0	-	4.7
	Ending Short term Investment	p+k-m	q	20	-	5	57
	Beginning Short term Debt		r	0	-	26.1	0
	Ending Short term Debt	r+n-o	s	0	26.1	-	0