Ending short-term debt

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© The McGraw-Hill Companies, 2002

Edition, Alternate Edition

CHAPTER 19 Short-Term Finance and Planning 663

Notice that the ending short-term debt is just equal to the cumulative deficit for the entire year, $20 million, plus the interest paid during the year, $3 million + .4 million = $3.4 million, for a total of $23.4 million.

Our plan is very simple. For example, we ignored the fact that the interest paid on the short-term debt is tax deductible. We also ignored the fact that the cash surplus in the first quarter would earn some interest (which would be taxable). We could add on a number of refinements. Even so, our plan highlights the fact that in about 90 days, Fun Toys will need to borrow $60 million or so on a short-term basis. It's time to start lining up the source of the funds.

Our plan also illustrates that financing the firm's short-term needs will cost about $3.4 million in interest (before taxes) for the year. This is a starting point for Fun Toys to begin evaluating alternatives to reduce this expense. For example, can the $100 million planned expenditure be postponed or spread out? At 5 percent per quarter, short-term credit is expensive.

Also, if Fun Toys's sales are expected to keep growing, then the deficit of $20 million plus will probably also keep growing, and the need for additional financing will be permanent. Fun Toys may wish to think about raising money on a long-term basis to cover this need.

Ross et al.: Fundamentals VII. Short-Term Financial 19. Short-Term Finance of Corporate Finance, Sixth Planning and Management and Planning

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