Aggressive versus conservative seasonal funding strategy Dyna base Tool has forecast its total funds requirements for the coming year as shown in the following table.
Month
Amount
January
$2,000,000
July
$12,000,000
February
2,000,000
August
14,000,000
March
September
9,000,000
April
4,000,000
October
5,000,000
May
6,000,000
November
June
December
3,000,000
a. Divide the firm’s monthly funds requirement into (1) a permanent component and (2) a seasonal component, and find the monthly average for each of these components.
b. Describe the amount of long-term and short-term financing used to meet the total funds requirement under (1) an aggressive funding strategy and (2) a conservative funding strategy. Assume that, under the aggressive strategy, long term funds finance permanent needs and short-term funds are used to finance seasonal needs.
c. Assuming that short-term funds cost 12% annually and that the cost of long term funds is 17% annually, use the averages found in part a to calculate the total cost of each of the strategies described in part b.
d. Discuss the profitability–risk trade-offs associated with the aggressive strategy and those associated with the conservative strategy.
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