Dynabase Tool has forecast its total funds requirements 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 to 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 trade-offs associated with the aggressive strategy and those associated with the conservativestrategy.
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March 5, 2012

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