Hey guys, please help me on this long problem for this topic – Strategic Planning. I understand the question and explanation. I am just lost with the two sentences below in all-caps:
>>>>What did they mean by “CASH DEFICITS MUST BE MADE IN $10,000 INCREMENTS”.
>>>>When “THERE IS NO OUTSTANDING BALANCE ON THE LINE OF CREDIT LOAN ON APRIL 1”, does it mean the LOC is full/maximized and there's no room to borrow some more money just like credit limit in a credit card?
Thanks guy for your help!
The Raymar Company is preparing its cash budget for the months of April and May. THE FIRM HAS ESTABLISHED A $200,000 LINE OF CREDIT WITH ITS BANK AT A 12 PERCENT ANNUAL RATE OF INTEREST ON WHICH BORROWINGS FOR CASH DEFICITS MUST BE MADE IN $10,000 INCREMENTS. THERE IS NO OUTSTANDING BALANCE ON THE LINE OF CREDIT LOAN ON APRIL 1. Principal repayments are to be made in any month in which there is a surplus of cash. Interest is to be paid monthly. If there are no outstanding balances on the loans, Raymar will invest any cash in excess of its desired end-of-month cash balance in U.S. Treasury bills. Raymar intends to maintain a minimum balance of $100,000 at the end of each month by either borrowing for deficits below the minimum balance or investing any excess cash.
Monthly collection and disbursement patterns are expected to be the following:
•Collections
50% of the current month's sales budget and 50% of the previous month's sales budget.
•Accounts Payable Disbursements
75% of the current month's accounts payable budget and 25% of the previous month's accounts payable budget.
•All other disbursements occur in the month in which they are budgeted.
Budget Information
March
April
May
Sales $ 40,000 $ 50,000 $ 100,000
Accounts payable 30,000 40,000 40,000
Payroll 60,000 70,000 50,000
Other disbursements 25,000 30,000 10,000
In May, Raymar will be required to:
a.
Pay $900 interest.
b.
Borrow an additional $20,000 and pay $1,200 interest.
c.
Repay $20,000 principal and pay $1,000 interest.
d.
Borrow an additional $20,000 and pay $1,000 interest.
Explanation
Choice “d” is correct. In May, Raymar will need to borrow an additional $20,000 and pay $1,000 interest:
Current month sales $ 50,000
Previous months sales 25,000
Acct. Payable – current (30,000)
Acct. Payable – previous (10,000)
Payroll (50,000)
Other disbursements (10,000)
Net cash flow (25,000)
April cash flow (92,500)
Total deficit $ (117,500)
Prev borrowing 100,000
Borrow in May 20,000
Total borrowed $ 120,000
Interest:
$100,000 × 12% × 1/12 = $1,000
Choices “c”, “a”, and “b” are incorrect based on the above explanation.
.