Cash Budget in millions of dollars Q1 Q2 Q3 Q4 Q5 Sales 121

Cash Budget

(in millions of dollars)

                                     Q1             Q2            Q3                Q4              Q5

Sales                        $ 1,210       $ 1,510       $ 1,560        $ 1,360        $ 1,610

Total cash collections $ 1,210        $ 1,260      $ 1,310         $ 1,310

In any given period, Mooney’s purchases from suppliers generally account for 76% of the expected sales in the next period, and wages, supplies, and taxes are expected to be 15% of next period’s sales.

In the 3rd quarter, Mooney expects to expand one of its plants, which will require an additional $1,076 million investment.

Every quarter, Mooney pays $35 million in interest and dividend payments to long-term debt and equity investors.

Mooney prefers to keep a minimum target cash balance of at least $15 million at all times.

1. What is the net cash inflow that Mooney expects in Q2?

2. If Mooney is beginning this year with a cash balance of $38 million and expects to maintain a minimum target cash balance of at least $15 million, what will be its likely cash balance at the end of the year (after Q4)?

3. What is the maximum investable funds that the firm expects to have in the next year?

4. What is the largest cash deficit that the firm expects to suffer in the next year?

5. T or F: If a firm changes it credit policy and allows customers to pay in 90 days instead of 60 days, and everything else remains the same, the net cash flow in the next quarter is likely to decrease.

Solution

Note: There are no information given on paybles. So, we have assumed all the payments for purchase from suppliers and wages, supplies & taxes to be incurred in the same period in cash. Further, we

1. Qtr. 2 Cash collection = 1260. Purchase = 76% of the next period sales (Qtr 3) = 76% * 1560 = 1185.6; Expense on supplies, wages & taxes = 15% of the next period sales (Qtr 3) = 15% * 1560 = 234 ; Interest & Dividends = 35

Net Cash Inflow = 1260 - 1185.6 - 234 - 35 = -194.6 (Cash outflow)

2. As done in part 1 we calculate the net cash flow for all the quaters from 1 to 4. We will have additional cash out flow of 1076 million towards plant expansion in Qtr 3.

Purchases (76% of next period sales)

Cash on hand at end of Q 4 = 38 -199.1 -194.6 -1038.6 -190.1 = -1584.4

Cash on hand at all times = 15

So a deficit of -1584.4 has to be funded from external sources. A net cash balance would be 15 million

3. As per the calculation shown above we expect a deficit.

4. As per calculation in part 2 Qtr. 3 has highest cash deficit of 1038.6

5. True. Since cash collection period increases while cash payments remain the same it will lead to delay in cash collection from customers.