Reference no: EM132348607

Dynabase Tool has forecast its total funds requirement for the coming year as shown in the following table:

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 firms monthly funds requirements into (1) a permanent component and (2) a seasonal component, and find the monthly average for each of those components.

b) Describe the amount of long-term and short-term financing used to meet the total funds requirements 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 strategies describes in part b. Assume that the firms can earn 3% on any excess cash balances.

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