Complete The Following Problems: Problem 9.1 Cash Conversion

Complete The Following Problemsproblem 9 1 Cash Conversion Cycleprob

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. By submitting this paper, you agree: (1) that you are submitting your paper to be used and stored as part of the SafeAssign™ services in accordance with the Blackboard Privacy Policy ; (2) that your institution may use your paper in accordance with your institution's policies; and (3) that your use of SafeAssign will be without recourse against Blackboard Inc. and its affiliates.

Paper For Above instruction

Introduction

Financial management involves understanding various concepts that influence a company's liquidity, profitability, and overall financial stability. Among these concepts are the cash conversion cycle, financing options, trade credit costs, and bond valuation. This paper addresses these topics by analyzing specific problems related to each area, providing detailed calculations, and discussing their implications for corporate finance decisions.

Problem 9-1: Cash Conversion Cycle

The cash conversion cycle (CCC) measures how efficiently a company manages its working capital by calculating the time (in days) it takes for cash to flow through the business operations, from paying suppliers to collecting cash from customers. The CCC formula is:

\[ \text{CCC} = DSO + DIO - DPO \]

Where:

- DSO (Days Sales Outstanding) reflects the average number of days it takes to collect receivables.

- DIO (Days Inventory Outstanding) measures how long inventory remains on hand.

- DPO (Days Payables Outstanding) indicates how long the company takes to pay its suppliers.

Suppose a company reports the following:

- Accounts receivable turnover: 10 times per year

- Inventory turnover: 8 times per year

- Accounts payable turnover: 12 times per year

Calculating the days:

- DSO = 365 / 10 = 36.5 days

- DIO = 365 / 8 = 45.625 days

- DPO = 365 / 12 ≈ 30.42 days

Therefore, the CCC:

\[ \text{CCC} = 36.5 + 45.625 - 30.42 = 51.705 \text{ days} \]

A CCC of approximately 52 days indicates the company's cash is tied up in operations for about 52 days, which can impact liquidity and working capital management.

Problem 9-2: Short-Term vs. Long-Term Financing

Choosing between short-term and long-term financing involves assessing cost, flexibility, and risk. Short-term financing (e.g., working capital loans, lines of credit) typically has lower interest rates but may threaten liquidity if renewal becomes difficult. Long-term financing (e.g., bonds, term loans) usually involves higher interest rates but provides financial stability and predictability.

For instance, a firm may opt for short-term financing to cover seasonal fluctuations, while long-term debt funding might be suitable for capital investments like equipment or property. The decision depends on the company's cash flow stability, cost of capital, and strategic plans.

Analyzing the trade-offs:

- Short-term debt may have lower interest rates but carries refinancing risk, especially when market conditions tighten.

- Long-term debt commits the company to fixed payments, but generally offers lower annual interest rates over extended periods.

Problem 9-3: Cost of Trade Credit

Trade credit is a common form of short-term financing where suppliers allow buyers to delay payments. The cost of trade credit can be estimated by considering the discount rate available and the payment terms.

Suppose a supplier offers net 60 days, but provides a 2% discount if paid within 10 days. If the buyer chooses to pay after 60 days without taking the discount, the implicit cost of forgoing the discount can be calculated as:

\[ \text{Cost of trade credit} = \left(\frac{\text{Discount %}}{1 - \text{Discount %}}\right) \times \frac{365}{\text{pay period} - \text{discount period}} \]

Plugging in the numbers:

\[ = \left(\frac{0.02}{1 - 0.02}\right) \times \frac{365}{60 - 10} = 0.0204 \times 7.3 \approx 0.149 \text{ or } 14.9\% \]

This indicates the effective annual cost of not taking the early payment discount.

Problem 9-4: Bond Valuation

Bond valuation involves calculating the present value of future cash flows—the annual coupon payments and face value—discounted at the bond’s yield to maturity (YTM).

Suppose a bond has:

- Face value = $1,000

- Coupon rate = 5% (annual coupon = $50)

- Maturity = 10 years

- YTM = 6%

The bond's price (P) is:

\[ P = \sum_{t=1}^{10} \frac{C}{(1 + r)^t} + \frac{F}{(1 + r)^{10}} \]

Where:

- \(C = 50\)

- \(F = 1,000\)

- \(r = 0.06\)

Calculating:

- Present value of coupons (annuity):

\[ PV_{coupons} = 50 \times \left(\frac{1 - (1 + r)^{-10}}{r}\right) \]

\[ = 50 \times 7.3601 \approx 368.01 \]

- Present value of face value:

\[ PV_{F} = \frac{1,000}{(1 + 0.06)^{10}} \approx 558.39 \]

Total bond price:

\[ P \approx 368.01 + 558.39 = 926.40 \]

This demonstrates that when the YTM exceeds the coupon rate, the bond trades at a discount.

Problem 9-5: Bond Interest Rates

Bond interest rates, including the coupon rate and YTM, significantly influence a bond’s attractiveness and market price. Investors seek higher yields to compensate for risk, inflation, and market conditions.

The coupon rate remains fixed, but the YTM fluctuates with market interest rates and inversely affects bond prices. When market rates rise above the coupon rate, existing bonds decrease in value, and vice versa.

Understanding the relationship between bond interest rates and market dynamics helps investors and firms in making strategic decisions about issuing or investing in bonds.

Conclusion

Effective management of working capital, financing strategies, and bond investments are fundamental for maintaining financial health. The cash conversion cycle affects liquidity, while choosing appropriate short- and long-term financing impacts cost and risk. Calculating the true cost of trade credit ensures better cash flow management, and understanding bond valuation principles facilitates informed investment decisions. Mastery of these areas contributes to optimizing a firm’s financial performance and stability.

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