Project3 - 4300

Project3 - 4300 - (All numbers are in 000,000s format)...

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(All numbers are in 000,000’s format) Scenario 1 Cash Flow Statement review comments: After putting in my initial monthly projections and balancing my assumptions, I realized that CVS had no projected marketable securities whatsoever, which I initially thought contributed to the fact that CVS did not have any marketable securities on any of their prior balance sheets. After balancing the projections the first time, the Bank Line of Credit lines had enormous amounts of money in the monthly accounts. I knew that I needed an approximate 6% return on marketable securities, so I added a $2500 liabilities under Other Advances/(Payments) and re-balanced my assumptions. After the re-balance, I achieved my desired 6% return on marketable securities. Regarding surpluses and monthly cash requirements, the cash flow from operations and the net cash income were very volatile. April through July both contained heavy cash outflows, where the beginning of the year and post-July had substantial positive cash inflows. For the first half of the year, the Bank Line of Credit has a decreasing amount of money in the account, but after August, the money is in a surplus and is sent to marketable securities. a) When could the firm invest surplus funds and for how long? The Marketable Securities account starts in August and ends the year at a total of $8564. The firm does not receive cash surplus funds during the summer months in this scenario. From January to March, and from August to the end of the year, the cash flow statement says that the net cash flow is positive. For about 2/3 of the year, cash can be invested into any type of investments they want. During the summer months, however, CVS needs to sell off some of their investments to cover their shortfall in cash. b) In what type instruments should the firm invest its surplus funds? The firm should invest their surplus in short-term investments such as Treasury Bills or short- term Certificates of Deposits for a few reasons. First, these investments give the investor a great deal of liquidity. In the summer months, when the cash inflow dips significantly, we will need to sell some of these assets to cover the losses. Second, these investments allow the firm to switch investments easily. Since the short-term investments are sold easily and can be transferred, the risk of long-term holdings go out the window. c) When is the firm required to borrow under short-term credit facilities and for how long? In Scenario 1, the firm is required to borrow under short-term credit facilities from January to July. Due to my assumptions, a Bank Line of Credit is necessary during this time to pay the enormous amount of short term debt I predicted on the balance sheet. For example, at the beginning of the year, there is a projected $40,134 worth of current liabilities. To pay for this debt, we will require a substantial initial short-term credit facility. d)
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This note was uploaded on 02/24/2010 for the course FINA 4310 taught by Professor Impson during the Spring '10 term at North Texas.

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Project3 - 4300 - (All numbers are in 000,000s format)...

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