1 How can having excessive working capital reduce the profitability of the firm?

2. A swimming pool construction firm has had trouble getting clients to pay for their pools after construction has been completed. The firm charges a well-padded price and allows a 10% discount for payment received within 10 days of issue of the bill, net 40 days. What is the effective interest rate on funds used if a customer does not take advantage of the discount? The bill for the most popular pool is $10 000.

3. Franks Fish issues a $5000 prawn invoice marked '3/10, net 30'.

a) How much will Frank be owed if the client pays in 7 days?

b) What is the effective annual interest rate on funds used if the client pays in 25 days?

4. Sentrale Trading Co approaches its financier for about $100 000 and is offered a commercials bill at 6.35% for 180 days. How much will Sentrale receive?

5. ANZ Bank accepts a bill on behalf of a client, which has face value of $100 000. The term is 3 months from 1 December to 1 March in a leap year. The yield is 5.8%. How much will the investor have to provide to the borrower.

6. James Strand is a sole trader who runs a machinery and road - vehicle tyre business in a major country town. James needs funds to increase his stock. He decides to take out a $500 000 installment loan, repayable on a fixed monthly schedule at 6% fixed for 3 years.

(a) How much must James repay at the end of each month?

(b) What is the total amount repaid?

7. Instead of taking loan (Question 6), how much would James owe at the end of 3 years if he had taken out a $500 000 interest only loan for that period at 6% compounded monthly.

8. ABC Ltd arranges for an installment loan with its bank. The loan is for $1 million, the rate is fixed at 8.8% per annum and the period is 15 years. Repayments are due quarterly starting in 3 months' time and the interest is compounded quarterly. How much is each installment?

9. Energiservices (EGS) wants to raise more funds and decides on a rights issue. The issue will be on the basis of 1 for 3 and the subscription for each share in the rights issue will be $3. EGS are currently selling for $5.10. What are the theoretical ex-rights share and rights prices?