Asked by Dylan Wright on Jul 22, 2024
Verified
Your firm has a net cash inflow for the quarter of - $30 (negative) . The beginning cash balance is $15. Company policy is to maintain a minimum cash balance of $5 and borrow only the amount that is necessary to maintain that balance. How much does your firm need to borrow to have a zero cumulative surplus?
A) $10
B) $15
C) $20
D) $25
E) $30
Cumulative Surplus
The total amount of net income that a company retains over its life, after distributing dividends to shareholders.
Minimum Cash Balance
Minimum Cash Balance is the lowest amount of cash that a company seeks to maintain in its accounts to ensure financial stability and meet immediate operational needs.
- Examine and compute the net cash inflows and outflows to ascertain the necessity for borrowing in accordance with corporate policies.
Verified Answer
RS
Rohit SharmaJul 24, 2024
Final Answer :
C
Explanation :
To have a zero cumulative surplus, the net cash inflow for the quarter has to be equal to the amount borrowed.
The beginning cash balance is $15 and the minimum cash balance required is $5, leaving a buffer of $10.
Since the net cash inflow for the quarter is -$30, the firm needs to borrow enough to cover the shortfall and the buffer, which is $30 + $10 = $40.
However, the firm only wants to borrow the amount necessary to maintain the minimum cash balance of $5, which means they only need to borrow $5 more to reach that minimum.
So the best choice is C: $20.
The beginning cash balance is $15 and the minimum cash balance required is $5, leaving a buffer of $10.
Since the net cash inflow for the quarter is -$30, the firm needs to borrow enough to cover the shortfall and the buffer, which is $30 + $10 = $40.
However, the firm only wants to borrow the amount necessary to maintain the minimum cash balance of $5, which means they only need to borrow $5 more to reach that minimum.
So the best choice is C: $20.
Learning Objectives
- Examine and compute the net cash inflows and outflows to ascertain the necessity for borrowing in accordance with corporate policies.