Does anyone know why the answer for the following problem is $100k borrowing and not $200k, as long as they want to maintain $100k balance in account each month? Thank you for your help.
The Raymar Company is preparing its cash budget for the months of April and May. The firm has established a $200,000 line of credit with its bank at a 12 percent annual rate of interest on which borrowings for cash deficits must be made in $10,000 increments. There is no outstanding balance on the line of credit loan on April 1. Principal repayments are to be made in any month in which there is a surplus of cash. Interest is to be paid monthly. If there are no outstanding balances on the loans, Raymar will invest any cash in excess of its desired end-of-month cash balance in U.S. Treasury bills. Raymar intends to maintain a minimum balance of $100,000 at the end of each month by either borrowing for deficits below the minimum balance or investing any excess cash.
Monthly collection and disbursement patterns are expected to be the following:
• Collections
50% of the current month's sales budget and 50% of the previous month's sales budget.
• Accounts Payable Disbursements
75% of the current month's accounts payable budget and 25% of the previous month's accounts payable budget.
• All other disbursements occur in the month in which they are budgeted.
Budget Information
March April May
Sales $40,000 $50,000 $100,000
Acc/payable 30,000 40,000 40,000
Payroll 60,000 70,000 50,000
Other disbursements 25,000 30,000 10,000
In April, Raymar will be required to:
a. A need to borrow $100,000 on its line of credit for the cash deficit.
b. A need to borrow $50,000 on its line of credit for the cash deficit.
c. A need to borrow $90,000 on its line of credit for the cash deficit.
d. $45,000 in excess cash.
.
