Dynabasae Tool has forecast its total funds requirements for the coming year as shown in the following table.
Month Amount Month Amount
January 2,000,000 July 12,000,000
February 2,000,000 August 14,000,000
March 2,000,000 September 9,000,000
April 4,000,000 October 5,000,000
May 6,000,000 November 4,000,000
June 9,000,000 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 over 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 of 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.
a) Since lease fund requirement during the year is $ 2,000,000 , we have consider this as permanent fund requirement during the year. Month wise segregation is given below
Month Total Funds Required Permanent Funding Seasonal Funding
January $20,00,000 $20,00,000 $0
February $20,00,000 $20,00,000 $0
March $20,00,000 $20,00,000 $0
April $40,00,000 $20,00,000 $20,00,000
May $60,00,000 $20,00,000 $40,00,000
June $90,00,000 ...
The solution involves discussion on various aspects of Seasonal Fund Management.