Question

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.

(c) Show how the firm’s accounts receivables is expected to change over the next four quarters.

(d) Show how the firm’s accounts payables is expected to change over the next four quarters.

Answer 1

Accounts Receiavbles

Since the credit period offerred by the company is 30 days, 66% of the sales in any quarter would be realized in the same quarter itself.

Hence Accounts Receivable at the end of any quarter would be 1/3 of the sales in that quarter.

Accounts Receivable

Q0= 68

Q1= 210/3= 70

Q2 = 180/3 = 60

Q3 = =245/3 = 81.67

Q4 = 280/3 = 93.3

Accounts Payable

The company purchases 60% of next quarter sales in the current quarter and hence rest 40% of the sales in the same quarter.

Therefore,

	Q1	Q2	Q3	Q4	Q5
Sales	210	180	245	280	240
Purchases	192	219	266	256	96

50/90% of the purchases would be paid each quarter. Hence 40/ 90% of the purchases would be accounts payable each quarter.

Accounts Payble

85.33333

97.33333333

118.2222222

113.7778