Aggressive versus Conservative seasonal funding strategy Dynabase Tool has forecast its total funds requirement for the coming
Question:
Aggressive versus Conservative seasonal funding strategy Dynabase Tool has forecast its total funds requirement for the coming year as shown in the following table.
a. Divide the firm's monthly funds requirement into
(1) a permanent component and
(2) a seasonal component, and find the monthly average for each of these components.
b. Describe the amount of long-term and short-term financing used to meet the total funds requirement under
(1) an aggressive funding strategy and
(2) a conservative funding strategy. Assume that under the aggressive strategy, long-term funds finance permanent needs and short-term funds are used t finance seasonal needs.
c. Assuming that short-term funds cost 12% annually and that the cost of long-term funds is 17% annually, use the averages found in part (a) to calculate the total cost of each of the strategies described in part (b).
d. Discuss the profitability – risk tradeoffs associated with the aggressive strategy and those associated with the conservativestrategy.
Step by Step Answer:
Principles Of Managerial Finance
ISBN: 978-0136119463
13th Edition
Authors: Lawrence J. Gitman, Chad J. Zutter