Financial Instruments and Valuation

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Problem 9-1

Problem 9-1: Chapter15
Cash Conversion Cycle
Given the following information: (Amounts in 000's SAR)
20X1 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 53.08 54.88 50.55 44.97 Days of saled outstanding = (account Receivable) / (Daily Sales)
(2) Days of sales in inventory 40.73 43.66 42.30 18.20 Days of sales in inventory = (Inventories) / (daily CODS)
(3) Days payable outstanding 52.14 65.74 46.60 74.11 Days payable outstanding = (account Payable) / (daily COGS)
(4) Cash conversion cycle 41.67 32.80 46.25 (10.93) Cash conversion cycle = Days sales outstanding + Days of sales in inventory - Days payable outstanding

Problem 9-2

Problem 9-2: Chapter 15 Part (1) 20x1 20x2 20x3 20x4
Short-term vs. long-term financing SAR Percentage SAR Percentage SAR Percentage SAR Percentage
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. current assets 900 27.27% 1200 31.58% 1500 34.88% 1800 37.50%
Fixed assets 2400 72.73% 2600 68.42% 2800 65.12% 3000 62.50%
Recent financial results are as follows: (All amounts in 000's SAR) Total assets 3300 100.00% 3800 100.00% 4300 100.00% 4800 100.00%
Liabilities (dept) and Equity
20X1 20X2 20X3 20X4 current liabilities [$SAR] 400 12.12% [$SAR] 400 10.53% [$SAR] 400 9.30% [$SAR] 400 8.33%
Current assets 900 1,200 1,500 1,800 Long-term liabilities [$SAR] 900 27.27% [$SAR] 1,300 34.21% [$SAR] 1,700 39.53% [$SAR] 2,100 43.75%
Fixed assets 2,400 2,600 2,800 3,000 Total liabilities [$SAR] 1,300 39.39% [$SAR] 1,700 44.74% [$SAR] 2,100 48.84% [$SAR] 2,500 52.08%
Total assets 3,300 3,800 4,300 4,800 stockholders' equity [$SAR] 2,000 60.61% [$SAR] 2,100 55.26% [$SAR] 2,200 51.16% [$SAR] 2,300 47.92%
Current liabilities 400 800 1,200 1,600 Total liabilities and equity [$SAR] 3,300 100.00% [$SAR] 3,800 100.00% [$SAR] 4,300 100.00% [$SAR] 4,800 100.00%
Long-term liabilities 900 900 900 900 Part (2-3) 20x1 20x2 20x3 20x4
Owner's equity 2,000 2,100 2,200 2,300 Current Ratio Dept Ratio Current Ratio Dept Ratio Current Ratio Dept Ratio Current Ratio Dept Ratio
Total liabilities & equity 3,300 3,800 4,300 4,800 First Scenario 2.25 39% 1.50 45% 1.25 49% 1.13 52%
Second Scenario 2.25 39% 3.00 45% 3.75 49% 4.50 52%
(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. Current Ratio = Current Assets / Current Liabilities
Dept Ratio = Total Dept / Total Assets
(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. Part (4) from claculated Current Ratio, higher current ratio will lead to have lower risk for investment that means the firm can increase the asset according to the debt, similar meaning that the firm will have more ability to meet its debt

Problem 9-3

Problem 9-3: Cost of trade credit Chapter 15
Using a 360-day year, compute the cost of trade credit for each of the following:
% Discount Discount Period (days) Period after discount (days) Cost of Trade Credit
(1) 1/10, net 30 1% 10 30 18.18% APR = discount / principle x 1 / (period in days)
(2) 2/15, net 45 2% 15 45 24.49% where:
(3) 3/15, net 60 3% 15 60 24.74% principle = 1 - discount in decimal
period = (net days - days with discount) / 360

Problem 9-4

Problem 9-4: Bond valuation Chapter 7
Calculate the value of the bonds in each situation below:
Interest Paid Par/Face Value (SAR) Coupon Rate Years to maturity Current intrest rates Bond Valuation
Annually 10,000 6% 10 8% [$SAR] 8,657.98
Semi-annually 10,000 6% 10 7% [$SAR] 9,289.38
Annually 10,000 4% 15 5% [$SAR] 8,962.03
Semi-annually 10,000 8% 20 10% [$SAR] 8,284.09
Semi-annually 10,000 8% 20 6% [$SAR] 12,311.48

Problem 9-5

Problem 9-5: Bond interest rates Chapter 7
What is the current annual interest rate on bonds that sell for the following?
Current Price (SAR) Par/Face value (SAR) Coupon Rate Years to Maturity Current Annual intrest rate
12,842 10,000 6% 10 2.72% Current Annual Interest Rate =RATE(number of years,annual intrest payment,present value,future value, 0)
7,850 10,000 4% 15 6.25%
10,000 10,000 8% 20 8.00%
where:
annual interest payment = coupon rate x face value