Problem Set 2
BFF3651: Treasury Management
1. The Sydney Corporation has a 60-day average collection period and wishes to maintain a $160
million minimum cash balance. Each quarter has 90 days. Based on this and the information
given in the following cash budget, complete the cash budget. What conclusions do you draw?
SYDNEY CORPORATION
Cash Budget
(in millions)
Q1 Q2 Q3 Q4
Beginning receivables 240 100 110 120
Sales 150 165 180 135
Cash collections 290 155 170 165
Ending receivables 100 110 120 90
Total cash collections 290 155 170 165
Total cash disbursements 170 160 185 190
Net cash inflow 120 -5 -15 -25
Beginning cash balance 45 165 160 145
Net cash inflow 120 -5 -15 -25
Ending cash balance 165 160 145 120
Minimum cash balance 160 160 160 160
Cumulative surplus (deficit) 5 0 -15 -40
Cash collection = beginning receivables + (sales/3)
If customers buy on the first day of q1, they will pay on 61st day of q1. If they buy on the 30th
day, they will pay on the 90th day of q1. So, you can collect cash from sales that happen in first
30 days.
Ending receivable = Beginning receivable + sales – cash collection
Total cash collection = cash collection
Net cash inflow = Total cash collection - Total cash disbursement
Ending cash balance = Beginning cash balance + net cash inflow
Cumulative surplus = ending cash balance – minimum cash balance
The firm needs short-term financing.
2. Last month, Melbourne company announced that it would stretch out its bill payments to 45
days from 30 days. The reason given was that the company wanted to “control costs and optimize
cash flow.” The increased payables period will be in effect for all of the company’s 4,000 suppliers.
(i) What impact did this change in payables policy have on operating cycle? Its cash cycle?
(ii) What impact did the announcement have on suppliers?
(iii) Why don’t all firms simply increase their payables periods to shorten their cash cycles? Can
you suggest any alternative to lengthen payable payment period that will improve the firm’s
liquidity?
(iv) Exactly what is the cash benefit to Melbourne company from this change?
(v) Is it possible for a firm’s cash cycle to be longer than its operating cycle? Explain why or
why not.
i. It lengthened its payables period, thereby shortening its cash cycle.
ii. Their receivables period increased, thereby increasing their operating and cash cycles.
iii. An unethical business procedure. Zero balance account, controlled disbursement
iv. The need and cost of short-term financing will decline.
v. Since the cash cycle equals the operating cycle minus the accounts payable period, it is not
possible for the cash cycle to be longer than the operating cycle if the accounts payable period
is positive. Moreover, it is unlikely that the accounts payable period would ever be negative since
that implies the firm pays its bills before they are incurred.
3. Is it possible for a firm to have too much cash? Why would shareholders care if a firm
accumulates large amounts of cash?
It is possible; however, shareholders will prefer firms to make investment and generate return
instead of holding too much cash.
4. Brisbane Corp. is considering a new credit policy. The current policy is cash only. The new
policy would involve extending credit for one period. Based on the following information,
determine if a switch is advisable. The interest rate is 2.0 percent per period:
Current policy New policy
Price per unit $175 $175
Cost per unit $130 $130
Sales per period in units 1000 1100
If the switch is made, an extra 100 units per period will be sold at a gross profit of $175-130 =
$45 each. The total benefit is thus $45 x 100 = $4,500 per period. At 2.0 percent per period
forever, the PV is $4,500/.02 = $225,000.
The cost of the switch is equal to this period’s revenue of $175 x 1,000 units = $175,000 plus
the cost of producing the extra 100 units: 100 x $130 = $13,000.
The total cost is thus $188,000, and the NPV is $225,000 - 188,000 = $37,000.
The switch should be made.
