Develop a monthly cash flow budget for the company

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Reference no: EM132839872

Question - 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.

Cost of goods sold sales (other than below) 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.

Required -

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

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

Reference no: EM132839872

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