B the firms permanent funds requirement is 500000

(b) The firm’s permanent funds requirement is $500,000.
Calculate financing costs for the first six months using the aggressive and conservative strategies.

632 Gitman • Principles of Finance, Eleventh Edition
Answer: Average monthly seasonal funds requirement:
$9,824,000/6 = $1,637,333
Aggressive strategy:
$1,637,333 (0.11/2) = $ 90,053
500,000 (0.13/2) = 32,500
$122,553
Conservative strategy:
$2,500,000 (0.13/2) = $162,500
Level of Difficulty: 4
Learning Goal: 2
Topic: Aggressive versus Conservative Financing Strategy
7. Tim’s Sons Company is interested in making sure they have enough money to finance their assets.
The company’s current assets and fixed assets for the months of January through December are
given in the following table.
Month Current Assets Fixed Assets Total Assets
January $60,000 $70,000 $130,000
February 58,000 70,000 128,000
March 55,000 70,000 125,000
April 47,000 70,000 117,000
May 40,000 70,000 110,000
June 41,000 70,000 111,000
July 40,000 70,000 110,000
August 37,000 70,000 107,000
September 38,000 70,000 108,000
October 33,000 70,000 103,000
November 40,000 70,000 110,000
December 50,000 70,000 120,000
(a) Find the average monthly seasonal and permanent funds requirement.
(b) What is the total cost of financing under the aggressive and conservative strategies. Assume
short-term funds costs 4.5 percent and the interest rate for long-term funds is 12 percent.
(c) Find the net working capital under the aggressive and conservative strategies.

Chapter 14 Working Capital and Current Assets Management 633
Answers:
Month
Current
Assets
Fixed
Assets
Total
Assets
Permanent
Requirement
Seasonal
Requirement
January $60,000 $70,000 $130,000 $103,000 $27,000
February 58,000 70,000 128,000 $103,000 25,000
March 55,000 70,000 125,000 $103,000 22,000
April 47,000 70,000 117,000 $103,000 14,000
May 40,000 70,000 110,000 $103,000 7,000
June 41,000 70,000 111,000 $103,000 8,000
July 40,000 70,000 110,000 $103,000 7,000
August 37,000 70,000 107,000 $103,000 4,000
September 38,000 70,000 108,000 $103,000 5,000
October 33,000 70,000 103,000 $103,000 0
November 40,000 70,000 110,000 $103,000 7,000
December 50,000 70,000 120,000 $103,000 17,000
$143,000
(a) Monthly permanent requirement = $103,000
Average seasonal requirement = 143,000/12 = $11,916.67
(b) Aggressive:
Total costs = 11,916.67  0.045 + 103,000  0.12 = $12,896.25
Conservative:
Total costs = 103,000  0.12 = $15,600
(c) Net Working Capital:
Aggressive Strategy: $33,000
Conservative Strategy: $60,000
Level of Difficulty: 4
Learning Goal: 2
Topic: Aggressive versus Conservative Financing Strategy
8. Sansatrip Products has ten different items in its finished goods inventory. The average number of
units held in inventory and the average unit cost are listed for each item. The firm uses an ABC
system of inventory control.
Item
Average Number
of Units in Inventory
Average Cost
Per Unit
1 3,000 $1.50
2 500 10.00
3 4,000 12.00
4 50 40.00
5 10,000 5.00
6 340 15.00
7 1,500 3.00
8 460 30.00
9 2,500 25.00
10 390 4.10

634 Gitman • Principles of Finance, Eleventh Edition
(a) Which items should be considered to be in the A category of an ABC system of inventory?
(b) Which items should be considered to be in the B category of an ABC system of inventory?
Answers:
Item
Average Cost
Per Unit
Average Number
of Units in Inventory
Average
Investment
1 $1.50 3,000 $ 4,500
2 10.00 500 5,000
3 12.00 4,000 48,000
4 40.00 50 2,000
5 5.00 10,000 50,000
6 15.00 340 5,100
7 3.00 1,500 4,500
8 30.00 460 13,800
9 25.00 2,500 62,500
10 4.10 390 1,599
Total $196,999
(a) Items 3, 5, and 9 should be considered in the A category.
(b) Item 10 clearly belongs to the C category. All the rest of the inventory items have
about an equal investment and most likely belong in the B category.