Sterling Company has Php 20 million in temporary investments split between stocks and high-yield deposits. It also has Php 30 million in short-term borrowings. It recently took out a Php 10 million loan but no longer needs the funds. As CFO, you could use the Php 10 million in excess liquidity to pay down some of the short-term debt, saving over Php 780,000 in interest costs per year.

1. PROBLEM: STERLING COMPANY
Sterling Company is a fast growing
merchandising firm. Last year's balance
sheet shows a temporary investments
aggregating to Php 20 Million. The firm's
portfolio includes Php 10 Million worth of
stocks and Php 10 Million high-yield
deposits. The stock market is bullish and
prevailing interest rates on premium
deposits range from 5% to 6%.

2. The Company's financial statements
also disclose short-term borrowings
amounting to Php 30 Million. Average
short-term loan interest is 8% P.A.

3. This morning, the company availed of a
Php 10 Million 60 day clean loan at 10%
P.A. The funds were supposed to be used
to finance a special order from a valued
client. For some reasons though, the order
was cancelled at noon today, and the firm
suddenly ends up with excess liquidity.
As CFO, what would you do?

4. ASSETS
Cash 10M
Temporary Investments 20 M
Inventories(Stocks) 10 M
High-yield deposits 10 M
TOTAL CURRENT
ASSETS 50 M
LIABILITIES
Short-term borrowings 30 M
60 day clean loan 10 M EXCESS LIQUIDY
TOTAL CURRENT
LIABILITIES 40 M

5. CLEAN LOAN-Loan granted by the
bank without accepting any security.
But the bank will safeguard
themselves by checking the repaying
capacity based on the salary
certificate/income statement.

6. I = PRT
I- INTEREST
P- PRINCIPAL
R- RATE
T- TIME

7. I=PRT
= (30M) (8%) (360/360)
=2,400,000
=200,000 MONTHLY INTEREST

8. I=PRT
=(10M) (10%) (60/360)
I= 166,666.67
=83,333.34 MONTHLY INTEREST

9. AS CFO WHAT SHOULD YOU DO?
-use the 10M excess liquidity to finance
working capital

10. THE STOCK MARKET IS BULLISH(STRONG-
UPWARD MOVING)
Bull market
A bull market is associated with increasing
investor confidence, and increased investing in
anticipation of future price increases (capital
gains). A bullish trend in the stock market often
begins before the general economy shows clear
signs of recovery.
USE THE EXCESS LIQUIDITY AS AN
ADDITIONAL WORKING CAPITAL

11. BEAR MARKET
A market condition in which the prices of securities
are falling, and widespread pessimism causes the
negative sentiment to be self-sustaining. As investors
anticipate losses in a bear market and selling
continues, pessimism only grows.

12. WORKING CAPITAL
The assets of a business that can be
applied to its operation.
on the balance sheet is the difference
between current assets and current
liabilities.

13. ACQUISITION ALLOCATION
-clean loan
use as additional
working capital
-unload stocks
-issue bonds
-withdraw deposits

14. use the excess liquidity to pay a part of the 30M short term debt
(refinancing of debt)
=30M- 10M =30M- 9,833,333.33 30m
= 20M =20,166,666.7
I= prt I= prt i=prt
=
(20M)(8%)(360/360)
=(20,166,666.7)(8%)(36
0/360)
=(30M)(8%)(360/36
0)
=1,600,000 =1,613,333.34 =2,400,000
=133,333.33 =134,444.44 =200,000
savings monthly= 65,555.56
savings for a year= 786,666.72