I am looking for the formula’s only.
Dynabase Tool has forecast its total funds requirements for the coming year as shown in the following table.
Month Amount
January $2,000,000
February 2,000,000
March 2,000,000
April 4,000,000
May 6,000,000
June 9,000,000
July $12,000,000
August 14,000,000
September 9,000,000
October 5,000,000
November 4,000,000
December 3,000,000
A. Divide the firm’s monthly funds requirement into (1) a permanent component and (2) a seasonal component, and find the monthly average for each of these components.
B. Describe the amount of long-term and short-term financing used to meet the total funds requirement under (1) an aggressive funding strategy and (2) a conservative funding strategy. Assume that, under the aggressive strategy, long-term funds finance permanent needs and short-term funds are used to finance seasonal needs.
C. Assuming that short-term funds cost 5% annually and that the cost of long-term funds is 10% annually, use the averages found in part a to calculate the total cost of each of the strategies described in part b. Assume that the firm can earn 3% on any excess cash balances.
D. Discuss the profitability-risk trade-offs associated with the aggressive strategy and those associated with the conservative strategy.
Following table show 1) a permanent component and (2) a seasonal component, and find the monthly average for each of these components
| Month | Total Funds Requirements | Permanent Requirements | Seasonal Requirements |
| January | $2,000,000 | $2,000,000 | $0 |
| February | 2,000,000 | 2,000,000 | 0 |
| March | 2,000,000 | 2,000,000 | 0 |
| April | 4,000,000 | 2,000,000 | 2,000,000 |
| May | 6,000,000 | 2,000,000 | 4,000,000 |
| June | 9,000,000 | 2,000,000 | 7,000,000 |
| July | 12,000,000 | 2,000,000 | 10,000,000 |
| August | 14,000,000 | 2,000,000 | 12,000,000 |
| September | 9,000,000 | 2,000,000 | 7,000,000 |
| October | 5,000,000 | 2,000,000 | 3,000,000 |
| November | 4,000,000 | 2,000,000 | 2,000,000 |
| December | 3,000,000 | 2,000,000 | 1,000,000 |
Average permanent requirement = $2,000,000
Average Seasonal requirement =$48,000,000 ¸ 12
= $ 4,000,000
(b)
(1) Under an aggressive strategy, the firm would borrow from $1,000,000 to $12,000,000 according to the seasonal requirement schedule shown in (a) at the prevailing short-term rate. The firm would borrow $2,000,000, or the permanent portion of its requirements, at the prevailing long-term rate.
(2) Under a conservative strategy, the firm would borrow at the peak need level of $14,000,000 at the prevailing long-term rate.
(c) Aggressive = ($2,000,000 ´ 0.10) + ($4,000,000 ´ 0.05)
= $200,000 + $200,000
= $400,000
Conservative = ($14,000,000 ´ 0.10)
= $1,400,000
(d) In this case, the large difference in financing costs makes the aggressive strategy more attractive. Possibly the higher returns warrant higher risks. In general, since the conservative strategy requires the firm to pay interest on unneeded funds, its cost is higher. Thus, the aggressive strategy is more profitable but also more risky.
