Problem: Dynabasae Tool has forecast its total funds requirements for the coming year as shown in the following table.
Month Amount Month Amount
January $2,000,000 July $12,000,000
February 2,000,000 August 14,000,000
March 2,000,000 September 9,000,000
April 4,000,000 October 5,000,000
May 6,000,000 November 4,000,000
June 9,000,000 December 3,000,000
Q1. Divide the firm’s monthly funds requirements into (1) a permanent component and (2) a seasonal component, and find the monthly average for each of these components.
Q2. 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.
Q3. Assuming that short-term funds cost over 12% annually and that the cost of long-term funds is 17% annually, use the averages found in part (1) to calculate the total cost of each of the strategies described in part (2)
Q4. Discuss the profitability – risk tradeoffs associated with the aggressive strategy and those associated with the conservative strategy