Critical Thinking: Working capital and Characteristics of Bonds (110 Points)

  1. Complete the following problems:

    Problem 9-1: Cash conversion cycle
    Problem 9-2: Short term vs. long term financing
    Problem 9-3: Cost of trade credit
    Problem 9-4: Bond valuation
    Problem 9-5: Bond interest rates
    You can access the problem details by clicking on Working Capital and Bonds in your course.
    Complete the problems in an Excel spreadsheet. Be sure to show your work to receive credit.

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Module 9 Critical Thinking Assignment

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Working Capital and Bonds

20X1

20X2

20X3

20X4

1,200

900

900

900

900

3,300

3,800

4,300

4,800

Chapter 15

Interest

10,000

6%

10

Annually

10,000

Semi-annually

10,000

8%

Semi-annually

10,000

8%

20

6%

Chapter 7

Current

Par/Face

Coupon

Years to

Value (SAR)

Rate

Maturity

10,000

6%

10

10,000

4%

15

10,000

8%

20

Problem 9-1:

Chapter

15

Cash Conversion Cycle

Given the following information: (Amounts in 000’s SAR)

20

X1

20X2

20X3

20X4

Sales – net

4,250

5,314

7,877

10

,942

Cost of goods sold

2,975

3,720

5,514

7,659

Accounts receivable

618

799

1,091

1,348

Inventories

332

445

639

382

Accounts payable

425

670

704

1,555

Calculate for each year:

(1) Days sales outstanding

(2) Days of sales in inventory

(3) Days payable outstanding

(4) Cash conversion cycle

Problem 9-2:

Chapter 15

Short-term vs. long-term financing

Medina Hardware operates many hardware stores and is planning to expand to other areas.

The firm has historically reinvested earnings and borrowed using short-term borrowing.

Recent financial results are as follows: (All amounts in 000’s SAR)

Current

assets

900

1,200

1,500

1,800

Fixed assets

2,400

2,600

2,800

3,000

Total assets

3,300

3,800

4,300

4,800

Current liabilities

400

800

1,600

Long-term liabilities

Owner’s equity

2,000

2,100

2,200

2,300

Total liabilities & equity

(1) Prepare new balance sheet information assuming current liabilities remain unchanged

at 400 SAR each year and the 400 SAR increase in debt is added to long-term liabilities.

(2) Calculate the current ratio and debt ratio for each year under the first scenario.

(3) Calculate the current ratio and debt ratio for each year under your revised

scenario with the additional debt added to long-term liabilities.

(4) Explain which of the two alternatives is riskier and why.

Problem 9-3: Cost of trade credit

Using a 360-day year, compute the cost of trade credit for each of the following:

(1) 1/10, net 30

(2) 2/15, net 45

(3) 3/15, net 60

Problem 9-4: Bond valuation

Chapter 7

Calculate the value of the bonds in each situation below:
Current

Interest

Par/Face

Coupon

Years to

Paid

Value (SAR)

Rate

Maturity

Rates

Annually

10,000

6%

 10

8%

Semi-annually

7%

4%

 15

5%
20

10%

Problem 9-5: Bond interest rates

What is the current annual interest rate on bonds that sell for the following?

Price (SAR)

12,842

7,850
10,000

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