FMGT TUTORIAL QNS
Review Questions
14-1) Why is short-term financial management one of the most important and time-consuming activities of the financial manager? What is net working capital?

14-3) Why does an increase in the ratio of current to total assets decrease both profits and risk as measured by net working capital? How do changes in the ratio of the current liabilities to total assets affect profitability and risk?

14-5) Why is it helpful to divide the funding needs of a seasonal business into its permanent and seasonal funding requirements when developing a funding strategy.

14-6) What are the benefits, costs and risks of an aggressive funding strategy and of a conservative funding strategy? Under which strategy is the borrowing often in excess of the actual need?

Problems
14-4) Aggressive versus conservative seasonal funding strategy
Dynabase Tool has forecast its total finds requirements for the coming year as shown in the following table.

Month
Amount

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 requirements 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 12% annually and that the cost of long-term funds is 17% annually, use the averages found in part a to calculate the total cost for each of the strategies described in part b.

D. Discuss the profitability-risk tradeoffs associated with the aggressive strategy and those associated with the conservative strategy.


also. thank you yeling! for helping to type out these. :)

2:01 PM
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