Answer to Question #168565 in Accounting for Fikir

Question

Unity University

Department of Accounting and Finance

Working Capital Management (ACFN 342)

Assignment Two (For ACFN 2011)

By Ins. Fitsum T   

 It is group assignment ( with a group of 2 to 3 individuals)

 It should be on hand writing form and you have to submit on the due date.

 Write your name, ID, section and other information at the separate cover page. 

                              

Part 1. From the information given below construct ECL company cash budget for six months period starting from January 2020 till June 2020.

ECL all sales are made on credit terms of 2/10, net 30, meaning that a 2 percent discount is allowed if payment is made within 10 days, and, if the discount is not taken, the full amount is due in 30 days. However, like most companies, ECL finds that some of its customers delay payment up to 60 days. Experience has shown that payment on 30 percent of ECL’s dollar sales is made during the month in which the sale is made — these are the discount sales. On 70 percent of sales, payment is made during the month immediately following the month of sale. 

The costs to ECL materials average 60 percent of the sales prices of the finished products. These purchases are generally made one month before the firm expects to sell the finished products, but ECL’s purchase terms with its suppliers allow 40% on cash on the purchased date and 60% to delay payments for 30 days. Accordingly, if January sales are forecasted at $100 million, then purchases during December will amount to $60 million and out of this $24 million of cash will be paid on December and the remaining $36 million will actually be paid in January.

ECL makes estimated tax payments of $12 million on February and $15 million on May. Also, a $70 million payment for a new plant must be made in April and $25 million payment for research and development must be made in March. Assuming that ECL’s target cash balance is $8 million, and that it projects $10 million to be on hand on January 1, 2020, what will its monthly cash surpluses or short falls are for the period from January to June? 

Such other cash expenditures as wages, lease payments and other expenses are also built into the cash budget along with gross sales as follows

Months 

(in 2002) sales wage s. lease pay. Oth.

December $250

January $350 $35 $12 $7

February $350 $60 $12 $15

March $400 $150 $12 $15

April $400 $155 $12 $12

May $400 $110 $12 $9

June $450 $65 $12 $8

July $300

N.B  the projected sales and projected expenditure are in Million dollars.

 

Part 2. Optimum Cash balance 

1. Green Incorporation has an annual cash demand of $1.5 million. Transaction cost is given as $ 100 per purchase or sale of securities. Interest on borrowings is given as 10 percent. Determine constant cash injections, using Baumol model.

2. OMEGA Investments Incorporation has an annual cash demand of $ 500,000. Transaction cost is given as $ 150 per purchase or sale of securities. Interest on borrowings is given as 8 percent. Determine constant cash injections, using Baumol model.

3. ABC Limited sets its minimum cash balance as $ 2,000 and estimates the following:

Transaction cost per sale/purchase = $ 10 

Standard deviation………………. = $ 1,000 per day

Interest rate ……………………… = 10.95 percent per annual. Or  0.03 per day

     Calculate the spread using Miller-Orr model?

Answer 1

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