Question

Background
You are an Analyst for the professional service firm, BUSI 1043 LLP. Your firm specializes in providing a wide variety of internal business solutions for different clients. After 4 months on the job, you walk into the partner’s office to provide him with your two week notice. Given your excellent performance over the past few months, rival professional service firm, BUSI 2083 LLP has provided you with an offer you cannot refuse by providing you with a promotion to Consultant and a significant raise. Although sad to see you go, lead partner Justin Medakiewicz requested assistance on one last engagement, Average Joe’s Gym.

Additional Information
Average Joe’s caters to families and gives a substantial discount for families to work out together. Families that workout together reach their goals together. Members receive 2 free training sessions with enrollment so that they may start reaching their goals as soon as they sign up. The exercise specialists that provide the training to the members hold the highest certification credentials and come from accredited universities with a specific degree focus in Exercise Science and or Health Education.

The company has experienced significant growth in the past five years due to an increase in the popularity of health and fitness among social trends. As a result Average Joe’s has applied to TD Bank for a $1 million long term loan in order to finance further expansion plans. Specifically, the funds would be used to purchase additional gym equipment.

Average Joe’s application and financial statements have been provided by Lisa Jennings, a credit analyst with TD Bank. She would like BUSI 1043 to conduct a preliminary review of Average Joe’s financial statements and determine whether Average Joe’s should proceed further into a more detailed analysis. Lisa would like BUSI 1043 to document the recommendations and supporting analysis in a report that will be maintained by the bank.

Lisa: “Average Joe’s has provided us with a copy of their most recent Balance Sheet and Income Statement (Exhibit I). I know this may not be enough to make the final decision, but it should be more than enough for you to get started.”

You: “Yes, I can obtain much information from these two statements”.

Lisa: “Okay, that’s great. I took a quick look at the Balance Sheet and am wondering what has caused the change in cash. Cash is needed to payback the loan. Although I haven’t done any rigorous analysis, it is a bit concerning to see the cash decline by such a large amount.”

You: “I can definitely look into the decrease in cash.”

Lisa: “It may also be useful to give some thought to what the Balance Sheet may look like if the loan is approved. Historical statements are fine, but they will not be able to provide you with this information. Additional information on the use of the loan is provided in Exhibit II.”

You: “That is a great point. I will take this into consideration.”

Lisa: “Alright. Let me know if I can be of any further assistance. I look forward to reading your report. If you recommend to proceed with further due diligence, can you prepare a list of additional information that would be useful in making our final decision?”

You: “Yes, I can most certainly do that. I will get started right away.”

You are excited with this last assignment and want to leave BUSI 1043 with a good impression. You begin to conduct some preliminary research by requesting industry comparables from the bank. You have located various industry ratios that can be used as a benchmark (Exhibit III).

Required: Prepare the report. Exhibit I: Financial Statements

Exhibit I: Financial Statements Average Joe's Gym Statement of Financial Position As at Dec 31 2014 2013 Assets Current Cash Marketable Securities Accounts Receivable Inventory Prepaid Expenses 235,359 145,780 223,450 425,770 17,500 1,047,859 134,550 457,206 174,930 355,790 19,500 1,141,976 Capital Property and Equipment, net TOTAL ASSETS 2,756,950 2,492,655 3,804,8093,634,631 Liabilities and Shareholders' Equity Current Accounts Payable Accrued and Other Liabilities Current Portion of Long-Term Debt 294,305 237,595 375,900 907,800 95,700 244,760 345,900 686,360 1,280,330 1,601,500 Long Term Debt Shareholders Equity Common Shares (50,000 outstanding) Retained Earnings TOTAL LIABILITIES AND SHAREHOLDERS EQUITY 595,817 595,817 1,020,862 750,953 3,804,8093,634,631

Exhibit II – Additional Information Regarding the Loan

•  The loan will be used to purchase $1 million in additional capital assets. The additional assets will result in an increase in revenue of 20%.

•  The loan will bear interest at 6%. Principal payments of $200,000 per annum will be required.

•  The company will withhold any dividend payments during the foreseeable future in order to

  support the debt to equity ratio.

•  The capital assets are expected to have a useful life of 15 years with no residual value.

•  All other fixed expenses are expected to remain consistent.

•  The existing loan will require a principal payment of approximately $375,900 during the

  upcoming fiscal year. The payment for the following fiscal year is expected to be $300,000.

•  Accounts receivable, inventory, prepaid expense, and accounts payable will all increase by 40%

  as a result of the increased sales.

•  The marketable securities will be converted to cash at the beginning of the year.

Answer 1

Below is report for is .
1.Return on equity is 15% that is good for a service industry and for providing loan and repayment of the loan from the company side .

2. Return on assets is 8% and that reflects that it can repay loan and as well as to pay the interest om timely basis .

3.Finance leverage is 7% that reflects it is a sound company in overall financial terms .

4. Earning per share is good and reflects good earnings as well as the cash generation per year .  

5. Sales of the company will rise with 20 % due to loan and equipment purchase from this .

6. Business plan is good it is related to health of people as well as more concentrated on the families .

7.Discounts given on different scenarios and relationship with the customers is also good .

8. In terms of cash there is increase in sales,there is sell off of the marketable securities and with a large change in the accounts payable give clear picture that there is increase in cash balance of the company this year. although Lisa thinks there is decrease in cash but there is subsequent increase in cash and cash is used to purchase assets, decrease in long term assets and increase in retained earnings .

9.There is a sale off of the marketable securities and give you a view that company used its short term assets to fulfill short term requirements .

10.Increase in account receivables but this can be neglect ,as well as same with increase in inventory .

11. There is a increase in P P E that clearly cash has been used to purchase equipment and will increase revenue .

12.Liabilities side give a simple view that there is a increase in the retained earnings clearly express there is more money for the capital expenditure .

13. Even though there is a large increase in accounts payable that give a negative effect but this may be for short term and definitely will be paid on time as in service industry there is low chances of accounts payable .

14. A large pay off of long term debts give a view that company is willingness to pay its debt .

15.Increase in sales and cost of sales is constant with each other and that gives a view that there is no decrease in the expense even though increase in sales .

16. Increase in other expense is around 10% that is less than increase in sales , and helps to increase in the operating income more rapidly around 33%

17. Increase in net income is around 36% and it is due to a large income from marketable securities .

18. Increase in retained earnings is also affected by the constant dividend as there is increase in profit but no increase in the dividend from the company share holders .

19. Overall view is good and bank should give the loan to the company for its growth in future .Positive points like no dividend for foreseeable future give boost to increase the retained earnings and cash for other capital expense , life of the asset is 15 years that gives a view that company need to perform a small amount of provision for depreciation for future. On a negative point there is increase in the AR ,AP , inventory , prepaid expense that gives a view that there will will be more requirement of the expense in future .