Dynabase Tool has forecast its total funds requirements for the coming year as shown in the following table.
Month Amount
January $2,000,000
February 2,000,000
March 2,000,000
April 4,000,000
May 6,000,000
June 9,000,000
July $12,000,000
August 14,000,000
September 9,000,000
October 5,000,000
November 4,000,000
December 3,000,000
a. Divide the firm%u2019s 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 5% annually and that the cost of longterm funds is 10% 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%u2013risk trade-offs associated with the aggressive strategy and those associated with the conservative strategy.