SHORT-TERM FINANCING AND OPTIONS CONTRACT

Jeff Warren, the CFO and the board of directors of Baldwin Inc. have taken enough time to discuss capital budgeting, dividend policy, and capital structure and now want to focus their attention on short-term finance and cash planning of the company. The board is considering the ways to improve the working capital management of the company. They are also discussing various sources of short-term financing and the minimum amount of money to borrow in the short-term to finance inventory and accounts receivable associated with sales growth. Jeff opened the meeting with the statement that the company must investigate its cash cycle and find ways to improve it because he has noticed a deterioration in the cash flow management of the firm.

Jeff was worried that the inventory period of the company has increased from 70 days in the previous year to 80 days in the current year and the accounts receivable period has also increased from 47 days in the previous year to 55 days in the current year whilst the accounts payable period remains the same at 52 days. He explained that if the two components of cash cycle i.e., operating cycle and accounts payable period are not improved, the company might need to borrow $5.5 million short-term next year to fill the gap between short-term cash inflows and cash outflows.

Don't use plagiarized sources. Get Your Custom Essay on
SHORT-TERM FINANCING AND OPTIONS CONTRACT
Get an essay WRITTEN FOR YOU, Plagiarism free, and by an EXPERT!
Order Essay

Jeff presented to the board the following ratios to show how the company has performed over the past two years:

Exhibit 1: Asset   Utilization Ratios of Baldwin Inc.

Asset Utilization Ratios           2019             2020

Inventory turnover                 5.14 times   4.5 times

Inventory period                       70 days   80 days

Accounts Receivable period    47 days   55 days

Accounts Payable period           52 days   52 days

Operating cycle                         117 days   ?

Cash cycle                                    65 days   ?

 

The Credit manager of the company, Josh Waters explained that the company can change some aspects of its short-term financial policy and find alternative financing policies to fund current assets to improve its working capital management. Another board member, Jacky Jackson was of the view that cash budget is a primary tool of short-term financial planning that can be used to improve the cash management of Baldwin Inc. She believed that having short-to-medium term cash budget for the next five years can help the company identify its short-term financial needs or opportunities and the required amount needed to borrow for the next five years. In that way the company will be able to arrange for short-term finance in advance to reduce the risk of cash shortages. With the expected improvement in current asset management of the company, some investors believe that the company’s stock price will increase. One investor, Desmond Clinton is of the opinion that buying a call option on the stock will give him the right to purchase more of the stock of the company now at a fixed price before the price of the stock jumps up. The stock price of Baldwin is currently $25. The exercise price is $30 per share. The call option and put option on the company’s stock expires in one year.

The board is determined to improve the company’s short-term financial management policies and wants you to assist them achieve that objective.

1. Using the ratios presented by Jeff, the board chairman wants you to calculate the following and explain what they mean to all the board members:

i).       Operating cycle of the company for 2020

ii).     Cash cycleof the company for 2020

2.   Given the asset utilization ratios, do you think the cash management of Baldwin Inc. has improved or worsened over the past year and why? Suggest two ways to improve the cash cycle of the company

3.  The board is concerned that the net working capital might be declining and not meet the $800,000 minimum requirement of the company. The company has a cash balance of $300,000, other current assets of $1.8 million and current liabilities of $1.3 million. Should the board worry about the company’s net working capital?

4.  The board wants to adopt a restrictive short-term financial policy to improve on its cash management. Identify three aspects of restrictive short-term financial policy the company should consider.

5.   The cash budget shows that the company will need $2.5 million to finance its working capital needs in next three years. List five sources of short-term financing the company can use to raise the money.

6. Explain to Desmond Clinton the difference between a call option and a put option.

Homework Sharks
Order NOW For A 10% Discount!
Pages (550 words)
Approximate price: -

Our Advantages

Plagiarism Free Papers

All our papers are original and written from scratch. We will email you a plagiarism report alongside your completed paper once done.

Free Revisions

All papers are submitted ahead of time. We do this to allow you time to point out any area you would need revision on, and help you for free.

Title-page

A title page preceeds all your paper content. Here, you put all your personal information and this we give out for free.

Bibliography

Without a reference/bibliography page, any academic paper is incomplete and doesnt qualify for grading. We also offer this for free.

Originality & Security

At Homework Sharks, we take confidentiality seriously and all your personal information is stored safely and do not share it with third parties for any reasons whatsoever. Our work is original and we send plagiarism reports alongside every paper.

24/7 Customer Support

Our agents are online 24/7. Feel free to contact us through email or talk to our live agents.

Try it now!

Calculate the price of your order

We'll send you the first draft for approval by at
Total price:
$0.00

How it works?

Follow these simple steps to get your paper done

Place your order

Fill in the order form and provide all details of your assignment.

Proceed with the payment

Choose the payment system that suits you most.

Receive the final file

Once your paper is ready, we will email it to you.

Our Services

We work around the clock to see best customer experience.

Pricing

Flexible Pricing

Our prces are pocket friendly and you can do partial payments. When that is not enough, we have a free enquiry service.

Communication

Admission help & Client-Writer Contact

When you need to elaborate something further to your writer, we provide that button.

Deadlines

Paper Submission

We take deadlines seriously and our papers are submitted ahead of time. We are happy to assist you in case of any adjustments needed.

Reviews

Customer Feedback

Your feedback, good or bad is of great concern to us and we take it very seriously. We are, therefore, constantly adjusting our policies to ensure best customer/writer experience.