Question

You work in the treasury department of a manufacturing company and have been tasked to prepare...

You work in the treasury department of a manufacturing company and have been tasked to prepare a short-term financial plan for the coming year. The projected sales forecasts for the next five quarters are, respectively, $210m, $180m, $245m, $280m, and $240m. The firm sells on credit and takes, on average, 30 days to collect from its customers; $68m in receivables are currently outstanding. Also, the firm orders a quarter in advance on credit—purchases in a given quarter is 60% of next quarter’s sales and the firm typically takes 50 days to pay its suppliers. Quarterly selling, general, and administrative expenses are estimated to be 25% of corresponding quarterly sales, and the firm expects to pay quarterly dividends of $12m. The purchasing manager plans to acquire a high-performance machine in the second quarter for $160m.

The firm would like to maintain a consistent cash balance of $10m in a non-interest bearing bank account. Although it currently has $64m in cash, it would like to redirect excess cash to short-term money market investments. Shortfalls, should they occur, are to be financed to achieve the target cash balance as well. 90-day commercial paper with a face value of $100,000 is selling at $98,814 and Treasury bills of a similar maturity are selling at 99.11% of par value; yields of both instruments are expected to remain stable over time. The firm has a $400m line of credit with a quoted quarterly rate of 1.6% and a compensating balance of 5%, which should be sufficient for its short-term financing needs. However, it also has the option to factor its receivables at a 1.5% discount.

(a) Compare the yields on the 90-day commercial paper and Treasury bill. In which money market instrument should the firm invest its cash surpluses, assuming yield is the only consideration?

Homework Answers

Answer #1
Yeild in %
90 days commercial Paper =100000-98814 1186 4.800939138 =(1186/98814)*(360/90)*100
Treasury Bill yield =100000-99110 890 3.59196852 =(890/99110)*(360/90)*100
Since 90 days commercial Paper is giving better yield, the firm should invest in it.
However, one should also keep in mind that interest or yield received on 90 days commercial paper is not
tax exempt, where as treasury bill yield is tax exempt. So, eventually it may so happen that treasury bill
is giving more yeild than commercial paper
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
You work in the treasury department of a manufacturing company and have been tasked to prepare...
You work in the treasury department of a manufacturing company and have been tasked to prepare a short-term financial plan for the coming year. The projected sales forecasts for the next five quarters are, respectively, $210m, $180m, $245m, $280m, and $240m. The firm sells on credit and takes, on average, 30 days to collect from its customers; $68m in receivables are currently outstanding. Also, the firm orders a quarter in advance on credit—purchases in a given quarter is 60% of...
You have recently been appointed by Hilkon Manufacturing to work in the newly established treasury department....
You have recently been appointed by Hilkon Manufacturing to work in the newly established treasury department. Hilkon Manufacturing is a small company that produces cardboard boxes in a variety of sizes for different purchasers. Samesh Hilkon, the owner of the company, works primarily in the sales and production areas of the company. Currently, the company puts all receivables in one box and all payables in another. Because of the disorganized system, the finance area needs work, and that’s what you...
36. Cash Management by investing in marketable securities such as Treasury Bills, Commercial Paper, of Negotiable...
36. Cash Management by investing in marketable securities such as Treasury Bills, Commercial Paper, of Negotiable Certificates of Deposit are all forms of short-term lending. T F 37. If a firm has a profit margin of 10%, it can increase sales by lowering its credit standards T F 38. Financing Working Capital with Short-Term Financing rather than Long-Term Financing will generally be more profitable. T F
Assume ABC Company has asked you to not only prepare their 2017 year-end Balance Sheet but...
Assume ABC Company has asked you to not only prepare their 2017 year-end Balance Sheet but to also provide pro-forma financial statements for 2018. In addition, they have asked you to evaluate their company based on the pro-forma statements with regard to ratios. They also want you to evaluate 3 projects they are considering. Their information is as follows: End of the year information: Account 12/31/17 Ending Balance Cash 50,000 Accounts Receivable 175,000 Inventory 126,000 Equipment 480,000 Accumulated Depreciation 90,000...
You have been asked to prepare a December cash budget for Ashton Company, a distributor of...
You have been asked to prepare a December cash budget for Ashton Company, a distributor of exercise equipment. The following information is available about the company’s operations: The cash balance on December 1 is $58,600. Actual sales for October and November and expected sales for December are as follows: October November December Cash sales $ 73,200 $ 78,000 $ 92,000 Sales on account $ 485,000 $ 568,000 $ 663,000 Sales on account are collected over a three-month period as follows:...
You have been asked to prepare a December cash budget for Ashton Company, a distributor of...
You have been asked to prepare a December cash budget for Ashton Company, a distributor of exercise equipment. The following information is available about the company’s operations: The cash balance on December 1 is $53,400. Actual sales for October and November and expected sales for December are as follows: October November December Cash sales $ 77,000 $ 81,200 $ 87,800 Sales on account $ 435,000 $ 538,000 $ 644,000 Sales on account are collected over a three-month period as follows:...
Assume ABC Company has asked you to not only prepare their 2017 year-end Balance Sheet but...
Assume ABC Company has asked you to not only prepare their 2017 year-end Balance Sheet but to also provide pro-forma financial statements for 2018. In addition, they have asked you to evaluate their company based on the pro-forma statements with regard to ratios. They also want you to evaluate 3 projects they are considering. Their information is as follows: End of the year information: Account 12/31/17 Ending Balance Cash 50,000 Accounts Receivable 175,000 Inventory 126,000 Equipment 480,000 Accumulated Depreciation 90,000...
The management of Zigby Manufacturing prepared the following estimated balance sheet for March 2017: ZIGBY MANUFACTURING...
The management of Zigby Manufacturing prepared the following estimated balance sheet for March 2017: ZIGBY MANUFACTURING Estimated Balance Sheet March 31, 2017 Assets Cash $ 80,000 Accounts receivable 487,500 Raw materials inventory 93,390 Finished goods inventory 438,000 Total current assets 1,098,890 Equipment, gross 640,000 Accumulated depreciation (170,000 ) Equipment, net 470,000 Total assets $ 1,568,890 Liabilities and Equity Accounts payable $ 215,690 Short-term notes payable 32,000 Total current liabilities 247,690 Long-term note payable 520,000 Total liabilities 767,690 Common stock 355,000...
You have been asked to prepare a December cash budget for Ashton Company, a distributor of...
You have been asked to prepare a December cash budget for Ashton Company, a distributor of exercise equipment. The following information is available about the company’s operations: a. The cash balance on December 1 is $46,000. b. Actual sales for October and November and expected sales for December are as follows: October November December   Cash sales $ 78,200   $ 77,600   $ 95,000     Sales on account 460,000 534,000   606,000       Sales on account are collected over a three-month period as follows:...
To prepare a master budget for April, May, and June of 2019, management gathers the following...
To prepare a master budget for April, May, and June of 2019, management gathers the following information. ZIGBY MANUFACTURING Estimated Balance Sheet March 31, 2019 Assets Cash $ 54,000 Accounts receivable 354,375 Raw materials inventory 100,495 Finished goods inventory 333,000 Total current assets 841,870 Equipment 628,000 Accumulated depreciation (164,000 ) Equipment, net 464,000 Total assets $ 1,305,870 Liabilities and Equity Accounts payable $ 212,195 Short-term notes payable 26,000 Total current liabilities 238,195 Long-term note payable 514,000 Total liabilities 752,195 Common...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT