If the firm’s beginning cash balance for the budget period is $7,000, and this is its desired minimum balance, determine when and how much the firm will need to borrow during the budget period. The firm has a $50,000 line of credit with its bank, with interest (10 percent annual rate) paid monthly.
November-6,600
December-25,600
January-5,000
Well, it looks like this firm is in quite the financial predicament. With a beginning cash balance of $7,000 and a desired minimum balance of $7,000, it seems like they're starting off on the right foot. However, as we dive deeper into the budget period, things start to get a little hairy.
In November, the firm will find themselves in a tight spot with a projected balance of negative $6,600. Yikes! It's like they're giving money away to strangers dressed as clowns at a circus.
Moving on to December, things go from bad to worse. The firm will need to borrow a whopping $25,600 just to keep their heads above water. It's like they're in the deep end of the finance pool, desperately reaching for a life preserver made of dollar bills.
And just when they thought the worst was behind them, January comes along and smacks them in the face with a rude awakening. The firm will need to borrow an additional $5,000 to make it through the month. It's like they've entered a financial version of the Hunger Games, desperately fighting for survival.
So, to sum it all up, this firm will need to borrow a total of $31,600 during the budget period. And with that 10 percent annual interest rate, they better hope they don't end up juggling with their budget like a clown juggles with bowling pins.
To determine when and how much the firm will need to borrow during the budget period, follow these steps:
1. Calculate the cash balance at the end of each month:
- November: The beginning cash balance is $7,000, and there is a deficit of $6,600. Therefore, the cash balance at the end of November would be $7,000 - $6,600 = $400.
- December: The beginning cash balance is $400, and there is a deficit of $25,600. Therefore, the cash balance at the end of December would be $400 - $25,600 = -$25,200.
- January: The beginning cash balance is -$25,200, and there is a deficit of $5,000. Therefore, the cash balance at the end of January would be -$25,200 - $5,000 = -$30,200.
2. Identify the periods when the cash balance is negative (a deficit) and how much needs to be borrowed during those periods:
- December: The firm will need to borrow $25,200 in December to cover the deficit.
- January: Since the cash balance is already in a deficit from the previous month, the firm will need to borrow an additional $5,000 in January to cover the deficit.
Therefore, the firm will need to borrow a total of $25,200 + $5,000 = $30,200 during the budget period.
To determine when and how much the firm will need to borrow during the budget period, we need to assess the cash flows for each month and see if the beginning cash balance is lower than the desired minimum balance of $7,000.
1. November:
- Beginning cash balance: $7,000
- Cash flow: $6,600 (negative)
- Ending cash balance: $7,000 - $6,600 = $400 (This is lower than the desired minimum balance, so the firm will need to borrow)
The firm needs to borrow $6,200 ($6,600 negative cash flow minus the ending cash balance).
2. December:
- Beginning cash balance: $7,000 + $6,200 (previous borrowing) = $13,200
- Cash flow: $25,600 (negative)
- Ending cash balance: $13,200 - $25,600 = $-12,400 (Negative ending balance means the firm needs to borrow)
The firm needs to borrow $12,400 ($25,600 negative cash flow minus the ending cash balance).
3. January:
- Beginning cash balance: $7,000 + $6,200 (previous borrowing) + $12,400 (previous borrowing) = $25,600
- Cash flow: $5,000 (negative)
- Ending cash balance: $25,600 - $5,000 = $20,600 (This is above the desired minimum balance, so the firm does not need to borrow during this month)
Therefore, the firm will need to borrow a total of $18,600 ($6,200 + $12,400) during the budget period. The borrowing will occur in November and December.
As for the interest on the line of credit, since it is a 10 percent annual rate paid monthly, you would need to calculate the interest separately for each month according to the outstanding balance.