Problem
I. The Furniture Corporation has an inventory turnover of 7, an average collection period of 45 days, and an average payment period of 30 days. Annual sales are $5 million, while the cost of goods sold is $1.8 million.
i. What is The Furniture Corporation's operating cycle and cash conversion cycle?
ii. Calculate the dollar value of inventory that would appear on the balance sheet at year end.
iii. Suppose The Furniture Corporation found a way to improve its inventory turnover from 7 to 10. What is the effect of this improvement on the working capital of the firm?
II. In April 2020, Southwest Airlines, which like other airlines was experiencing a dramatic drop in air travel due to the coronavirus pandemic, raised capital by selling $2 billion worth of convertible bonds. Each bond had a $1,000 par value, paid a 1.25% coupon rate, and matured in five years. Bondholders had the right to convert each bond into 25.9909 shares of Southwest common stock.
i. What is the conversion ratio?
ii. What is the conversion price?
iii. Suppose that the stock price increases up to $45. Should the investor exercise the conversion option?
iv. Explain your answer!