Preview

Selecting Kanton Company’s Financing Strategy and Unsecured Short-Term Borrowing Arrangement

Satisfactory Essays
Open Document
Open Document
517 Words
Grammar
Grammar
Plagiarism
Plagiarism
Writing
Writing
Score
Score
Selecting Kanton Company’s Financing Strategy and Unsecured Short-Term Borrowing Arrangement
Chapter 16

Chapter Case
Selecting Kanton Company’s Financing Strategy and Unsecured Short-Term Borrowing Arrangement
Morton Mercado, the CFO of Kanton Company, carefully developed the estimates of the firm’s total funds requirements for the coming year. These are shown in the following table.
Month
Total funds
Month
Total funds
January
$1,000,000
July
$6,000,000
February
1,000,000
August
5,000,000
March
2,000,000
September
5,000,000
April
3,000,000
October
4,000,000
May
5,000,000
November
2,000,000
June
7,000,000
December
1,000,000
In addition, Morton expects short-term financing costs of about 10% and long-term financing costs of about 14% during that period. He developed the three possible financing strategies that follow:
Strategy 1—Aggressive: Finance seasonal needs with short-term funds and permanent needs with long-term funds.
Strategy 2—Conservative: Finance an amount equal to the peak need with long-term funds and use short-term funds only in an emergency.
Strategy 3—Tradeoff: Finance $3,000,000 with long-term funds and finance the remaining funds requirements with short-term funds.
Using the data on the firm’s total funds requirements, Morton estimated the average annual short-term and long-term financing requirements for each strategy in the coming year, as shown in the following table. Average annual financing Strategy 1
Strategy 2
Strategy 3
Type of financing
(aggressive)
(conservative)
(tradeoff)
Short-term
$2,500,000
$ 0
$1,666,667
Long-term
1,000,000
7,000,000
3,000,000
To ensure that, along with spontaneous financing from accounts payable and accruals, adequate short-term financing will be available, Morton plans to establish an unsecured short-term borrowing arrangement with its local bank, Third National. The bank has offered either a line-of-credit agreement or a revolving credit agreement. Third National’s terms for a line of credit are an interest rate of 2.50% above the prime

You May Also Find These Documents Helpful

  • Satisfactory Essays

    The following data relate to the operations of Proctor Corporation, a wholesale distributor of consumer goods:…

    • 434 Words
    • 4 Pages
    Satisfactory Essays
  • Satisfactory Essays

    ACC T 1130 Payroll Accounting Chapter 7 – Manual Project – Check Figures – 2014 Edition October 23 Journal Entries: Payroll Cash 12 11,173.89 Cash 11 11,173.89 Administrative Salaries 51 2,307.69 Office Salaries 52 3,353.08 Sales Salaries 53 3,600.00 Plant Wages 54 5,223.92 FICA Taxes Payable – OASDI 20.1 898.05 FICA Taxes Payable – HI 20.2 210.04 Employees FIT Payable 24 997.00 Employees SIT Payable 25 444.70…

    • 171 Words
    • 2 Pages
    Satisfactory Essays
  • Good Essays

    In this case, the corporate cost of capital needs to be analyzed and hence, to estimate that, a company’s long-term source of funds (common stock, long-term debts and preferred stock) should be used. Since the corporate cost of capital is used to make decisions today, which will affect the future cash flows, the only acceptable costs are today’s marginal costs that are used. These marginal values are the estimates of the cost of capital that will be raised in future which will provide an accurate estimation of raising the capital in future.…

    • 1073 Words
    • 4 Pages
    Good Essays
  • Satisfactory Essays

    Lawson Case

    • 637 Words
    • 3 Pages

    Lawson is a clothing retailer who has recently met with a bank official asking them for a couple of new services from the bank. The first new service that they have requested is a bank loan that would be used to pay down their trade debt. Their current interest rate on the trade debt is 13.5% and the owner of Lawson, Paul MacKay, feels that he can secure a bank loan that would in turn have a lower interest rate. The second new service that they have requested is a line of credit, the line of credit would be used to help, when the sales are down and cash flow is short. Paul feels that a line of credit will ensure that the store will be able to meet their debt obligation with their main trade supplier.…

    • 637 Words
    • 3 Pages
    Satisfactory Essays
  • Powerful Essays

    Aggressive financing policies “...are those policies of investing a company’s assets to gain the highest rate of return on the investment”(Murdock). The two most common advantages to using this option of financing are:…

    • 1379 Words
    • 6 Pages
    Powerful Essays
  • Powerful Essays

    Case 2 Bucks

    • 674 Words
    • 3 Pages

    available capital, Buck entered into a three-year revolving line of credit (the “Facility”) with its…

    • 674 Words
    • 3 Pages
    Powerful Essays
  • Satisfactory Essays

    Assignment Week 1

    • 483 Words
    • 2 Pages

    9. Based on the following data, compute the total assets, total liabilities, and net worth.…

    • 483 Words
    • 2 Pages
    Satisfactory Essays
  • Satisfactory Essays

    Blood and Edition Answer Key

    • 9679 Words
    • 39 Pages

    Herlihy: The Human Body in Health and Illness, 4th Edition Answer Key - Study Guide Chapter 1: Introduction to the Human Body Part I: Mastering the Basics Matching—General Terms 1. D 2.…

    • 9679 Words
    • 39 Pages
    Satisfactory Essays
  • Good Essays

    2. How would you go about estimating the borrowing cost in the LBO years and the borrowing…

    • 634 Words
    • 3 Pages
    Good Essays
  • Better Essays

    Scott Equipment Organization is currently investigating a variety of short-term and long-term debt combinations in financing assets. Currently the firm has decided to employ $320 million in fixed assets in its operations for next year. However, this will depend upon the levels of current assets and anticipated sales. The earnings before interest and taxes (EBIT) for next year are $60 million and $6 million. The organization’s income tax rate is 40%. The stockholders’ equity will be used to finance $40 million of assets. This will be done with the remainder of the financed short-term and long-term debt.…

    • 1314 Words
    • 6 Pages
    Better Essays
  • Good Essays

    • The investments given in the case (Table A) fail to include estimates of cash and accounts receivable. Table F provides an estimate of the percentage of total assets needed at 16.3% $1,589,000 / (1-.163) = $1,898,447…

    • 580 Words
    • 3 Pages
    Good Essays
  • Satisfactory Essays

    A family business is considering making an investment in its manufacturing operation. Three decisions are under consideration: (1) a large investment; (2) a medium investment; and (3) a small investment. The business believes that there are three possible future outcomes for its product: (1) increasing demand; (2) stable demand; and (3) decreasing demand. The following payoff table describes the decision situation.…

    • 638 Words
    • 3 Pages
    Satisfactory Essays
  • Good Essays

    2. A moderate-risk mutual fund. Based on the information Brian provided her, Maggie estimates that with this option she stands a 50 percent chance of making a $40000 gain but also a 50 percent chance of losing $20000.…

    • 350 Words
    • 2 Pages
    Good Essays
  • Satisfactory Essays

    Assume that you recently graduated with a major in finance. You just landed a job as a financial planner with China Development Industrial bank (CDIB), a large financial services corporation. Your first assignment is to invest $100,000 for a client. Because the funds to be invested in a business at the end of 1 year, you have been instructed to plan a 1-year holding period. Further, your boss has restricted you to the investment alternatives in the following table, shown ith their probabilities and associated outcomes.…

    • 322 Words
    • 2 Pages
    Satisfactory Essays
  • Good Essays

    Short Term

    • 356 Words
    • 2 Pages

    There are numerous diverse sources offered for short term financing which is significant for companies to go on with the corporation’s day-to-day procedures. The important sources for short-term financing are overdrafts, trade credit, and short-term loans. These sources can be used for many reasons.…

    • 356 Words
    • 2 Pages
    Good Essays

Related Topics