4 Chapter 8 Case Study
Managing A Company’s Investments
The Situation
As with most mid-size to large companies, Lightning Wholesale has a finance department to manage its money. The structure of Lightning Wholesale’s financial plan allows each department to have its own bank account from which all expenses, purchases, and charges are deducted. This same account has all revenues and interest deposited into it.
The manager of the sporting goods department wants a summary of all interest amounts earned or charged to her department for the year 2013. This will allow her to better understand and assess the financial policies of the company and make any necessary changes for 2014.
The Data
|
Month |
Total Sales Revenue |
Cost of Goods Sold |
Operating Expenses |
|---|---|---|---|
| January | $1,798 | $2,102 | $156 |
| February | $2,407 | $2,242 | $100 |
| March | $2,568 | $2,606 | $222 |
| April | $2,985 | $2,719 | $258 |
| May | $3,114 | $2,831 | $269 |
| June | $3,242 | $2,887 | $280 |
| July | $3,306 | $3,363 | $286 |
| August | $3,852 | $4,203 | $333 |
| September | $4,815 | $6,306 | $525 |
| October | $7,222 | $11,210 | $625 |
| November | $12,839 | $8,408 | $1,111 |
| December | $9,630 | $1,569 | $833 |
| Select Dates | T-bill Yields | Prime Rate |
|---|---|---|
| December 31, 2012 | 2.85% | 4.25% |
| January 31, 2013 | 2.90% | 4.25% |
| February 28, 2013 | 2.87% | 4.25% |
| March 31, 2013 | 3.04% | 4.75% |
| April 30, 2013 | 3.09% | 4.75% |
| May 31, 2013 | 3.11% | 4.75% |
| June 20, 2013 | 3.07% | 4.75% |
| July 31, 2013 | 2.95% | 4.50% |
| August 31, 2013 | 2.92% | 4.50% |
| September 30, 2013 | 3.40% | 5.00% |
| October 31, 2013 | 3.45% | 5.00% |
| November 30, 2013 | 3.47% | 5.00% |
Important Information
- The balance in the sporting goods bank account on December 31, 2012, was $2,245,636.45.
- The bank account permits a negative balance, which the bank treats as an operating loan. The interest rate on any operating loan is prime + 0.5%. Accrued interest is placed into the account on the last day of each month.
- When a positive balance exists, the bank pays interest at 0.85% on the first $50,000 in the account and 1.2% only on the portion above $50,000. Interest is deposited on the last day of each month.
- On the last day of each month, the finance department purchases T-bills in the market that will mature by the last day of the next month. The face value of T-bills are bought in denominations of exactly $100,000 in a quantity as permitted by the current balance in the bank account. If the bank account has a negative balance (i.e., it is using its operating loan), no T-bills are purchased that month. For example, if the bank account has a balance of $350,000 on March 31, three $100,000 T-bills will be purchased with 30 days left to maturity.
- Assume all revenues are deposited to the account at the end of the corresponding month.
- Assume all cost of goods sold and operating expenses are deducted at the end of the corresponding month.
- For simplicity, assume the balance in the bank account remains unchanged throughout each month.
Your Tasks
The manager wants a report that summarizes the following information from December 31, 2012, to December 31, 2013:
- The total interest earned through T-bill investments.
- The total interest earned from the bank account.
- The total interest charged by any operating loans.
- The final balance in the bank account as of December 31, 2013, when no purchases of T-bills for January 2014 have been made.
In order to meet the manager’s requirements, work through 2013 month by month starting from December 31, 2012, by following the steps below. Once arriving at December 31, 2013, use the answers to provide the four pieces of information requested by the manager.
Using the opening balance, determine the face value of T-bills that can be purchased. If the balance is negative, no T-bills are purchased, so skip to step 4.
- Calculate the purchase price of the T-bills using the current market yield and the number of days until the end of the next month. The difference between the purchase price and the face value is the total interest earned for the month by T-bills.
- Deduct the purchase price of the T-bills from the balance in the account.
- Examine the account balance.
- If the balance is positive, calculate the interest earned for the month based on the tiered interest rate structure. This is the total interest earned by the investment for the month.
- If the balance is negative, charge interest to the account for the month using the interest rate charged by the bank. This is the total interest charged by the operating loan for the month.
- To figure out the balance at the end of the next month, take the balance from step 4, add the face value of the T-bills that are maturing at the end of the month, add any interest earned from the bank account (step 4a), deduct any interest charged on the operating loan (step 4b), add the revenues for the month, and deduct the expenses and cost of goods sold for the month.
- Go back to step 1 and repeat for the next month.
- When all months are complete, calculate the required totals and present the requested summary information to the manager.
