Problem
Santa Monica, Inc. is a retailer that is preparing its budget for the upcoming fiscal year. Management has prepared the following summary of its budgeted cash flows:
|
1st Quarter
|
2nd Quarter
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3rd Quarter
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4th Quarter
|
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Total cash receipts
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$500,000
|
$520,000
|
$480,000
|
$900,000
|
|
Total cash disbursements
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$530,000
|
$600,000
|
$480,000
|
$520,000
|
The company's beginning cash balance for the upcoming fiscal year will be $100,000. The company requires a minimum cash balance of $50,000 at the end of each quarter and may borrow any amount needed form a local bank at a quarterly interest rate of 3%. The company may borrow any amount at the beginning of any quarter and may repay its loans, or any part of its loans, at the end of any quarter. The company's policy is to take any cash above $50,000 and pay off whatever portion of its loans that it can. Interest payments are due on any principal at the time it is repaid.
Required:
Prepare the company's cash budget for the upcoming fiscal year using the template on the following page. Then, answer the following questions:
What is the ending cash balance for the year?
How much money was borrowed during the year?
How much interest was paid during the year?
The company has an opportunity to get a lower interest rate of 2.00%. If they did so, however, they would have to maintain a minimum cash balance of $100,000 at the end of each quarter. Should they do this?