PIEPKORN MANUFACTURING WORKING CAPITAL MANAGEMENT

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Assignment:

Answer these essay questions:

  1. PIEPKORN MANUFACTURING WORKING CAPITAL MANAGEMENT, PART 1

You have recently been hired by Piepkorn Manufacturing to work in its newly established treasury department. Piepkorn Manufacturing is a small company that produces cardboard boxes in a variety of sizes. Gary Piepkorn, the owner of the company, works primarily in the sales and production areas. Currently, the company puts all receivables in one shoe box and all payables in another. Because of the disorganized system, the finance area needs work, and that’s what you’ve been brought in to do. The company currently has a cash balance of $154,000 and plans to purchase new box folding machinery in the fourth quarter at a cost of $325,000. The purchase of the machinery will be made with cash because of the discount offered. The company’s policy is to maintain a target cash balance of $100,000. All sales are in cash and all purchases are made on credit. Gary Piepkorn has projected the following gross sales for each of the next four quarters:

PIEPKORN MANUFACTURING WORKING CAPITAL MANAGEMENT

Quarters

01

02

03

04

Gross Sales

$863,500

$918,500

$996,000

$924,000

Gross sales for the first quarter of next year are projected at $908,000. Piepkorn typically orders 50 percent of next quarter’s projected gross sales in the current quarter, and suppliers are typically paid in 53 days. Wages, taxes, and other costs run about 30 percent of gross sales. The company has a quarterly interest payment of $115,000 on its long-term debt. The company uses a local bank for its short-term financial needs. It pays 1.5 percent per quarter on all short-term borrowing and maintains a money market account that pays 1 percent per quarter on all short-term deposits. Gary has asked you to prepare a cash budget and short-term financial plan for the company under the current policies. He has also asked you to prepare additional plans based on changes in several inputs.

QUESTIONS

a. Use the numbers given to complete the cash budget and short-term financial plan.

b. Rework the cash budget and short-term financial plan assuming Piepkorn changes to a target balance of $80,000.

PIEPKORN MANUFACTURING

Short-Term Financial Plan

Q1

Q2

Q3

Q4

Beginning cash balance

Net cash inflow

Ending cash balance

Minimum cash balance

Cumulative surplus (deficit)

PIEPKORN MANUFACTURING

Short-Term Financial Plan

Q1

Q2

Q3

Q4

Target cash balance

Net cash inflow

New short-term investments

Income from short-term investments

Short-term investments sold

New short-term borrowing

Interest on short-term borrowing

Short-term borrowing repaid

Ending cash balance

Minimum cash balance

Cumulative surplus (deficit)

Beginning short-term investments

Ending short-term investments

Beginning short-term debt

Ending short-term debt

  1. PIEPKORN MANUFACTURING WORKING CAPITAL MANAGEMENT, PART 2

After completing the short-term financial plan for next year (above part 1), Gary Piepkorn approaches you and asks about the company’s credit policy. In looking at the competition, most companies in the industry offer credit to customers, so Piepkorn Manufacturing appears to be one of the few companies that does not. Several customers have expressed the possibility of changing to a different supplier because of the lack of credit. Gary is interested in knowing how implementing a credit policy will affect the short-term financial plan for next year.

Additionally, he would like you to inquire as to the possibility of getting improved credit terms for the company’s purchases. To analyze the possible switch to the new credit terms, Gary has asked you to investigate industry standard credit terms and rework the short-term financial plan assuming Piepkorn Manufacturing offers credit to its customers. He would also like to investigate how better credit terms from the company’s suppliers would affect the short-term financial plan.

a. You have looked at the credit policy offered by your competitors and have determined that the industry standard credit policy is 1/10, net 45. The discount will begin to be offered on the first day of the year. You want to examine how this credit policy would affect the cash budget and short-term financial plan. If this credit policy is implemented, you believe that 60 percent of customers will take advantage of the credit offer and the accounts receivable period will be 24 days. Rework the cash budget and short-term financial plan under the new credit policy and a target cash balance of $80,000. What interest rate are you effectively offering customers?

b. You have talked to the company’s suppliers about the credit terms Piepkorn receives. Currently, the company receives terms of net 45. Your suppliers have stated that they would offer new credit terms of 2/25, net 40. The discount would begin to be offered on the first day of the year. What interest rate are the suppliers offering the company? Rework your cash budget and short-term financial plan from the previous question assuming you take advantage of the discount offered.

  1. Suppose the rate of inflation in Russia will run about 3% higher than the U.S. inflation rate over the next several years. All other things being the same, what will happen to the ruble versus dollar exchange rate? What relationship are you relying on in answering?
  2. This question has to do with the Cash Account. Indicate the impact of the following corporate actions on cash, using the terms Increase, Decrease, or no change. For each, explain your conclusion.
  • A dividend is paid with funds received from a sale of debt
  • Real estate is purchased and paid for with short-term debt
  • Inventory is bought on credit
  • A short-term bank loan is repaid
  • Next years’ taxes are prepaid.