You work in the treasury department of a manufacturing company and have been tasked to do a short-term financial plan for the coming year.

You work in the treasury department of a manufacturing company and have been tasked to do 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?  

(b) Compare the effective rate for the line of credit and the factoring of receivables. Which is the less costly option for the firm to finance its cash deficits? 

(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. 

(e) Using your answers to parts (a) through (d), construct a short-term financial plan for the next four quarters, including: 

(i) all cash receipts 

(ii) all cash disbursements    

(iii) net cash flow     

(iv) how the amount of short-term investments changes   

(v) how the amount of short-term debt changes   

(vi) how the target cash balance is maintained 

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