Johnson's Tree Farm has a cash balance of $33 and a short-term loan balance of $200 at the beginning of quarter 1.The net cash inflow for the first quarter is $89 and for the second quarter there is a net cash outflow of $44.All cash shortfalls are funded with short-term debt.The firm pays 2 percent of its prior quarter's ending loan balance as interest each quarter.The minimum cash balance is $25.What is the short-term loan balance at the end of the first quarter?

Question

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At the end of the first quarter, the cash balance is $33 + $89 = $122. The minimum cash balance required is $25, so the excess cash is $122 - $25 = $97. The initial loan balance is $200, and the firm can use the excess cash to pay down the loan: $200 - $97 = $103. However, we must also account for the interest on the loan, which is 2% of the prior quarter's ending loan balance: 2% of $200 = $4. Therefore, the loan balance at the end of the first quarter is $103 + $4 = $107.

Johnson's Tree Farm Has a Cash Balance of $33 and a Short-Term