Lewis Printing has projected its sales for the first 8 months of 2014 as follows:
In addition, Lewis pays $ 10,000 per month for rent and $ 20,000 each month for other expenditures. Tax prepayments of $ 22,500 are made each quarter beginning in March. The company?s cash balance as of December 31, 2013, was $ 28,000; a minimum balance of $ 25,000 must be maintained at all times to satisfy the firm?s bank line of credit agreement. Lewis has arranged with its bank for short- term credit at an interest rate of 12 percent per annum (1 percent per month) to be paid monthly. Borrowing to meet estimated monthly cash needs takes place at the end of the month, and interest is not paid until the end of the following month. Consequently, if the firm needed to borrow $ 50,000 during April, then it would pay $ 500 (= 0.01 * $ 50,000) in interest during May. Finally, Lewis follows a policy of repaying its outstanding short- term debt in any month in which its cash balance exceeds the minimum desired balance of $ 25,000.
a. Lewis needs to know what its cash requirements will be for the next 6 months so that it can renegotiate the terms of its short- term credit agreement with its bank, if necessary. To evaluate this problem, the firm plans to evaluate the impact of a ± 20 percent variation in its monthly sales efforts. Prepare a 6- month cash budget for Lewis and use it to evaluate the firm?s cash needs.
b. Lewis has a $ 20,000 note due in June. Will the firm have sufficient cash to repay the loan?
This question was answered on: Jul 11, 2017
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