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.
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