Question

Q2: How large of a loan would be needed by year end 2007 to allow Jones Electrical to take advantage of the discount offered by his suppliers? Consider the impact of these discounts on COGS and Inventory as well. You can assume dividends are $0.

            Note: This problem requires Excel to iterate circular references OR use goal seek.

Q3: Should Jones try to increase their access to debt financing given the price discount offered?

       HINT: Try to figure out the annual interest rate that the supplier is effectively charging.

Be sure you can justify your assumptions, there is no one exact answer. Also consider what would happen if you change the assumptions? Where did you struggle choosing an appropriate assumption?

1.Does this firm appear to be managed well and have a business model worth investing in? If it is a profitable business, why are they struggling to stay in good standing with their trade accounts?

2. What is your assessment of how well Mr. Jones is managing his working capital and liquidity?

Exhibit 1: Income Statements (thousands of dollars) for Years Ending December 31, 2004-2006, and for the first quarter 2007 2004 2005 2006 2007 a $608 $499 $109 Net sales $1,624 $1,916 $2,242 $1,535 $381 $1,304 $320 $1,818 $424 Gtoss profit on sales Operating expenseb Interest ex Net income before taxes $272 $27 $307 $30 $347 $8 Provision for income taxes Net income $30 Exhibit 2: Balance Sheet (thousands of dollars) as of December 31, 2004-2006 and March 31, 2007 2004 2005 2006 Cash Accounts receivable Inventory Total Cuurrent Assets Property& equipment Accumulated d Total PP&E, net 2007 $33 $290 $432 $755 $252 $142 $110 $187 $243 $475 $187 $74 $113 $231 $278 $562 $202 $264 $379 $666 $252 $134 $118 ation $103 Total Assets $588 $665 $784 $865 $120 $249 $203 $250 Accounts payable Line of credit payable Accrued expenses Long term debt, current portion Total Current liabilities $42 $214 $149 $24 $222 $24 $294 $24 $489 $407 $182 $158 $134 $128 Long-term debt Total liabilities $404 $452 $541 $617 $%243 $784 $248 $865 Net worth $213 Total Liabilities and Net Worth $588 $665

Answer 1

Q1: Will the proposed max loan of $350,000 be sufficient to fund the firm in 2007 if Jones continues with their current payment practices?

he $350,000 line of credit may be sufficient, but only if Jones takes three steps:

1. he company should be more aggressive in collecting its Accounts Receivable so that its customers pay promptly or are subject to a penalty for not paying within 30 days.
2. The company should forego taking the 2% discount and instead should take the full amount of time to play his suppliers. This would leave the company with more cash on hand and would not require additional funding beyond the $350,000.
3. The company should make greater efforts forecast inventory needs. Although Jones is adept at demand forecasting, inventory levels are rising too quickly, which, coupled with the delayed payments from customers, has reduced the company’s cash. If Jones is able to reduce spending on inventory while still meeting customer demand, the $350,000 should be sufficient