A3+ has prepared its 3rd quarter budget and provided the following data: The cash balance on June 30 is projected to be $4,000. The company has to maintain a minimum cash balance of $5,000 and is authorized to borrow at the end of each month to make up any shortfalls. It may borrow in increments of $5,000 and has to pay interest every month at an annual rate of 5%. All financing transactions are assumed to take place at the end of the month. The loan balance should be repaid in increments of $5,000 whenever there is surplus cash. Calculate the final projected cash balance at the end of September.

Question

A3+ has prepared its 3rd quarter budget and provided the following data:  The cash balance on June 30 is projected to be $4,000. The company has to maintain a minimum cash balance of $5,000 and is authorized to borrow at the end of each month to make up any shortfalls. It may borrow in increments of $5,000 and has to pay interest every month at an annual rate of 5%. All financing transactions are assumed to take place at the end of the month. The loan balance should be repaid in increments of $5,000 whenever there is surplus cash. Calculate the final projected cash balance at the end of September.

Quizplus · Accepted Answer

- The projected cash balance on June 30 is $4,000.
- The company has to maintain a minimum cash balance of $5,000, so it needs a minimum of $1,000.
- To make up for the shortfall, the company has authorized borrowing in increments of $5,000, and it should borrow $5,000 at the end of June, which will bring the cash balance to $9,000.
- The company has to pay interest every month at an annual rate of 5%, which means the monthly interest rate is 5%/12 = 0.42%.
- At the end of July, the projected cash balance is $7,400 ($9,000 - $5,000 + $3,400). The interest on the loan for July is $5,000 * 0.42% = $21. The company should repay $5,000 of the loan, which will bring the loan balance to $1,000, and the cash balance will be $2,400.
- At the end of August, the projected cash balance is $9,650 ($2,400 - $0 + $7,250). The interest on the loan for August is $1,000 * 0.42% = $4.2. The company should repay $4,650 of the loan, which will bring the loan balance to $1,000, and the cash balance will be $5,000.
- At the end of September, the projected cash balance is $6,133 ($5,000 - $0 + $1,133). The interest on the loan for September is $1,000 * 0.42% = $4.2. The company should repay $1,133 of the loan, which will bring the loan balance to $0, and the cash balance will be $5,254 ($6,133 - $879). Therefore, the final projected cash balance at the end of September is $5,254.

A3+ Has Prepared Its 3rd Quarter Budget and Provided the Following