Reference no: EM132554857

Company B has entered into the following transactions for the current fiscal year. The board of the company wants to determine the short-term working capital funding needs of the company for the next six months. The company has approached a bank to negotiate a line of credit.

• This is a new venture so there is no opening cash
• Monthly sales are expected to be $50,000
• The accounts receivable terms are 50% the month after sale and 50% in the second month after sale
• Variable costs of sales are 40% and are paid the month following sale. The company operates under a just in time inventory system
• Labor costs are 20% of sales and are paid monthly when the sale takes place
• Overhead costs are 10% of sales and are paid in the following month
• Debt servicing costs include the repayment of a loan of $15,000 and interest of $3,000 every three months staring in month 3 of the fiscal year
• The company will buy equipment for $600,000 in month 1 but $300,000 will be funded by debt above plus common stock of $100,000. The debt to equity ratio of 3:1 is standard for the industry.
• Taxes of $68,000 will be paid in month 12
• Dividends of $50,000 will be paid in month 12 to common stockholders

Questions:

Question A. Develop a monthly cash flow budget for the company for the next six months.

Question B. Recommend the size of the working capital line of credit the company should negotiate.