Reference no: EM132889519

Problem 1 - The Woodstock Company has $1,312,500 in current assets and $525,000 in current liabilities. Its initial inventory level is $375,000, and it plans to raise funds as additional notes payable (N/P) and use them to increase inventory.

a) What are Woodstock's current and quick ratios before the funds are raised?

b) How much can Woodstock's short-term bank debt (N/P) increase without pushing its current ratio below 2.0?

c) What will be the firm's quick ratio after Woodstock has raised the maximum amount of notes payable?

Problem 2 - Eight years ago, exactly, the Crimson Company issued a $50 million, 10-year, $1,000 par value, callable bond, with a 7% annual coupon rate, and a 5% call premium over par. With 2 years to go before the bond matures, Crimson is considering calling the bond because interest rates have suddenly decreased. If it decides to call the bond, and since it still needs the funding for the remaining 2 years, it will replace the bond with a 2-year bank loan of an equivalent amount ($50 million), with an annual interest rate of 4%. Interest would be paid at the end of each year, and the principal repaid at maturity.

Calculate whether Crimson management would save by calling the bond and replacing it with the bank loan. Should it call its loan?