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Solution to Toy World, Inc.

Case 32A Toy World, Inc. Cash Budgeting

Copyright  1996 by the Dryden Press. All rights reserved.

CASE INFORMATION

PURPOSE

This case analyzes a straightforward cash budgeting problem. It is designed to illustrate the mechanics of a cash budget and the way cash budgets are used. Discussion questions focus on the rationale behind the use of cash budgets as well as on their inherent problems. The case also raises the issues of the target cash balance, the optimal size of the credit line, the investment of excess cash, and production scheduling for a seasonal business.

TIME REQUIRED

Without using the model, 3-4 hours of student preparation should be adequate for most students, with possibly another hour or so to write up the case if it must be handed in. Use of the spreadsheet model can greatly reduce preparation time, especially if the completed model or the easy macro version is given to students.

COMPLEXITY

A relatively simple, but with a fair amount of number crunching for students not using the spreadsheet model. However, a number of related issues can be discussed, so students can put in a significant amount of time on the case. Still, they can get the gist of it without too much trouble.

WAYS WE HAVE USED THE CASE

We have used this case in two very different ways. First, with both introductory and not very-well-prepared second course students, we ask them to read the case and to become generally familiar with it, and then we go through the case in class in lieu of a lecture to ensure that students see the issues involved. When we use the case in this manner, we always assign the directed version. The questions in the directed version lead students through the topics we want to address, and they provide structure to the class. The case itself sets the context in which all calculations and decisions are made, and this often works better than a pure lecture because the case makes the material seem "more relevant." We particularly like this usage with evening students and/or executives and managers. With more advanced students, we assign the case to 2-4 person teams. One team is asked to present their findings and conclusions to the class, and the other teams are asked to prepare written reports (5 page maximum for text, plus exhibits). We ask the students to play the role of internal or external consultants, reporting to management. When the case is assigned in this manner, we highly recommend the non-directed version. With the directed version, the presentation and reports are too mechanical--students just answer the specific questions. With the non-directed version, students have more scope to consider different things, and to use different numbers in arriving at their "answers." This makes things more interesting, and discussions among the students are more likely to arise.

In either type usage, we tell students to read the relevant chapter in their textbook in conjunction with work on the case. (Our students are asked to have a standard finance textbook for reference in the course. Some texts work better than others for reference purposes, but all texts cover the material in this and other cases.) We also tell students that in this case, as in the real world, they may not be provided all the data and other information they would like. Then we tell them that if an issue is addressed in the text chapter that seems relevant to the case, but no data is provided in the case, that we will give them "brownie points" for discussing how they, as consultants, would go about getting the missing data and then using it, and we encourage them to make up realistic data and then analyze it within the context of the case. This sometimes forces students to think about difficult but relevant issues, and it really opens things up in terms of giving them scope for digging into the subject. We have had students look up futures market data, yield curve data, and so forth. Of course, we have had other students who just do the minimum amount of work called for directly in the case. But the non-directed case does give students scope to go on with extra work if they want to.

NON-DIRECTED CASE TIPS

This case comes in both directed and non-directed versions. If you are using the non-directed version--the version without end-of-case question--your students will receive general guidance in the case, but they will not have a specific list of questions to answer. Thus, the first step that students must take in solving the non-directed version of this case is to develop a solution strategy. Then, they must execute their strategy to arrive at a case solution.

When we use the non-directed version of this case, we tend to give students a great deal of latitude. Of course, we expect all students to do a credible job of creating the base case. Beyond that, however, we tend to most reward those students that dig deepest into the case and thereby discover that there is a lot more subjectivity to capital budgeting cash flow analysis than first appears. As in the real world, we reward innovation and creativity more that mere mimicry, assuming of course that sound financial principles are not violated.

Since the directed and non-directed versions of this case are very similar, the solution to the directed version that we present here provides an excellent prototype solution to the non-directed version. In fact, we follow the directed case solution while students are making class presentations of their solutions to the non-directed case. We then raise those issues that students miss in their analysis either during or after the presentation. In that way, we ensure that the main points of the case are covered.

INSTRUCTOR PREPARATION

Regardless of which version you use, we recommend that you read through the case and then read through the questions and answers provided in this solution. The questions are from the directed case, and they touch on most of the points that occurred to us and that students are likely to bring up when they go through the case. Obviously, other points could be made, but the questions and answers will give you a good idea of how we deal with the case.

MODEL INFORMATION

DESCRIPTION

The spreadsheet model for this case, filename CASE32AI, creates both a monthly and a daily budget on the basis

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