60.1K

Verified Solution

Link Copied!

CHOW CHOW inc contemplates the following transactions for the first six months of 2021. The board of the company wants to determine the funding needs of the company and financing issues on a monthly basis. The company has approached a bank to negotiate financing. It typically uses long-term debt, and this is forecasted to be $40,000,000 at year-end.

• The opening cash of CHOW CHOW inc is $40,000,000.
• Monthly 2021 sales are expected to be $16,667,000 collected through accounts receivable.
• The 2021 monthly accounts receivable of $16,667,000 are first received in month 4 and monthly thereafter. The 2020 accounts receivable will be received month 1: $15,600,000, month 2: $15,600,000 and month 3: $15,650,000 (2020 accounts receivable total $46,850,000)
• 2021 variable cost of goods sold are 40% of sales and are paid starting in month 3 and monthly thereafter. 2020 accounts payable of $9,200,000 will be paid in month 1: $4,600,000 and month 2: $4,600,000.
• Fixed costs (excluding depreciation) in cost of goods sold of $1,250,000 a month are paid in the month of sale.
• Other fixed costs (excluding interest) of $4,833,000 a month are paid in the month of sale.
• The company will buy equipment for $55,000,000 in month 1.
• Inventory of $550,000 will be purchased in month 1.
• Interest of $1,000,000 will be paid in month 6.
• Taxes of $5,000,000 will be paid in months 3 and 6.
• Dividends of $5,000,000 will be paid in month 6.
• CHOW CHOW inc would always like a minimum of $10,000,000 of cash on hand for emergency purposes.
• The estimated increase in long-term debt over 2020 of $9,200,000 is to be finalized after the monthly cash flow study. 2020 year-end long-term debt was $30,800,000.

1. Prepare a monthly cash flow budget for the first six (6) months of 2021 for CHOW CHOW inc
2. Discuss the maximum financing that CHOW CHOW inc will require in the first six months of 2021. Is a $9,200,000 increase in long-term debt adequate? Also, note: the maximum long-term debt to equity ratio is 0.3:1 and equity for 2020 was $160,000,000. What planning would you suggest?
3. Which financing strategy has the CHOW CHOW inc been using to-date? (Closest strategy)

Answer & Explanation Solved by verified expert

See Answer