Holiday Tree Farm has a cash balance of $34 and a short-term loan balance of $180 at the beginning of Q1.The net cash inflow for the first quarter is $36 and for the second quarter there is a net cash outflow of $48.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 $20.What is the short-term loan balance at the end of Q2?

Question

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The correct answer is A. The short-term loan balance at the end of Q2 is $184.3.Explanation:The net cash inflow for the first quarter is $36. This means that the cash balance at the end of Q1 is $34 + $36 = $70. The firm pays 2 percent of its prior quarter's ending loan balance as interest each quarter. This means that the interest payment for Q1 is 2% * $180 = $3.6. This means that the cash balance at the end of Q1 is $70 - $3.6 = $66.4.The net cash outflow for the second quarter is $48. This means that the cash balance at the end of Q2 is $66.4 - $48 = $18.4. The minimum cash balance is $20. This means that the firm needs to borrow $20 - $18.4 = $1.6. The short-term loan balance at the end of Q2 is $180 + $1.6 = $184.3.

Holiday Tree Farm Has a Cash Balance of $34 and a Short-Term