Terrel Manufacturing expects stable sales through the summer months of June, July, and August of $500,000...
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Terrel Manufacturing expects stable sales through the summer months of June, July, and August of $500,000 per month. The firm will make purchases of S350,000 per month during these months. Wages and salaries are estimated at $60,000 per month plus 7 percent of sales. The firm must make a principal and interest payment on an outstanding loan in June of $100,000. The firm plans a purchase of a fixed asset costing $75,000 in July. The second quarter tax payment of $20,000 is also due in June. All sales are for cash. (a) Construct a cash budget for June, July, and August, assuming the firm has a beginning cash balance of $100,000 in June. The sales projections may not be accurate due to the lack of experience by a newly- hired sales manager. If the sales manager believes the most optimistic and pessimistic estimates of sales are $600,000 and $400,000, respectively, what are the monthly net cash flows and required financing or excess cash balances? Make your recommendations. (b) Coping with Uncertainty in the Cash Budget • One way to cope with cash budgeting uncertainty is to prepare several cash budgets based on several forecasted scenarios (e.g., pessimistic, most likely, optimistic). • From this range of cash flows, the financial manager can determine the amount of financing necessary to cover the most adverse situation. • This method will also provide a sense of the riskiness of alternatives. • An example of this sort of "sensitivity analysis" for Coulson Industries is shown Terrel Manufacturing expects stable sales through the summer months of June, July, and August of $500,000 per month. The firm will make purchases of S350,000 per month during these months. Wages and salaries are estimated at $60,000 per month plus 7 percent of sales. The firm must make a principal and interest payment on an outstanding loan in June of $100,000. The firm plans a purchase of a fixed asset costing $75,000 in July. The second quarter tax payment of $20,000 is also due in June. All sales are for cash. (a) Construct a cash budget for June, July, and August, assuming the firm has a beginning cash balance of $100,000 in June. The sales projections may not be accurate due to the lack of experience by a newly- hired sales manager. If the sales manager believes the most optimistic and pessimistic estimates of sales are $600,000 and $400,000, respectively, what are the monthly net cash flows and required financing or excess cash balances? Make your recommendations. (b) Coping with Uncertainty in the Cash Budget • One way to cope with cash budgeting uncertainty is to prepare several cash budgets based on several forecasted scenarios (e.g., pessimistic, most likely, optimistic). • From this range of cash flows, the financial manager can determine the amount of financing necessary to cover the most adverse situation. • This method will also provide a sense of the riskiness of alternatives. • An example of this sort of "sensitivity analysis" for Coulson Industries is shown
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Related Book For
Principles Of Managerial Finance
ISBN: 978-0136119463
13th Edition
Authors: Lawrence J. Gitman, Chad J. Zutter
Posted Date:
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