Average Joes Gym

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 partners 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 Joes Gym.

Additional Information

Average Joes 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 Joes 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 Joes 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 Joes financial statements and determine whether Average Joes 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 Joes 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, thats 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 havent 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 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.

Exhibit III Industry Benchmarks

2014 Ratio Industry Average

Profitability

1 Return on Equity 15.00%

2 Return on Assets 8.00%

3 Financial Leverage Percentage 7.00%

4 Earnings per Share $4.40

5 Quality of Income 75.00%

6 Profit Margin 10.00%

7 Fixed Asset Turnover 2.00

Tests of Liquidity

8 Cash Ratio 7.00%

9 Current Ratio 1.00

10 Quick Ratio 0.75

11 Receivable Turnover 13.00

12 Average Days in Accounts Receivable 28.08

13 Payable Turnover 19.00

14 Average Days in Accounts Payable 19.21

15 Inventory Turnover 6.50

16 Average Days in Inventory 56.15

Solvency and Equity Position

17 Times Interest Earned 5.40

18 Cash Coverage 6.30

19 Debt to Equity Ratio 1.35

Miscellaneous

20 Book Value Per Share $29.00

Prepare the report. It is to include, organized and presented in a logical manner:

quantitative analyses qualitative analyses appropriate recommendations given the case facts and analyses completes.

Please include any calculations.

Average Joe's Gym Statement of Financial Position As at Dec 31 2014 2013 Assets Current Cash Marketable Securities Accounts Receivable Inventory Prepaid Expenses 235,359 134,550 145,780 457,206 223,450 174,930 425,770355,790 19,500 1,047,859 1,141,976 17,500 Capital Property and Equipment, net 2,756,950 2,492,655 3,804,809 3,634,631 TOTAL ASSETS Liabilities and Shareholders' Equity Current Accounts Payable Accrued and Other Liabilities Current Portion of Long-Term Debt 294,305 95,700 237,595 244,760 345,900 07,800 686,360 375,900 Long Term Debt Shareholders Equity 1,280,330 1,601,500 Common Shares (50,000 outstanding) Retained Earnings 595,817 595,817 1,020,862 750,953 3,804,809 3,634,631 TOTAL LIABILITIES AND SHAREHOLDERS EQUITY Average Joe's Gym Income Statement For the Year Ended December 31st 2014 Sales Cost of Sales Gross Profit 2013 2,975,990 2,575,990 1,368,955 1,184,955 1,607,035 1,391,035 Expenses Amortization General and Administrative Marketing and Sales Interest Expense Office Expense Wages and Benefits, Administration Total Operating Expenses 155,490 125,490 134,500 102,800 175,680 155,600 76,820 96,090 295,980 255,000 15,000315,000 1,153,470 1,049,980 453,565 341,055 9,800 Operating Income Gain (losses) on marketable securities Impairment loss on capital assets 25,475 0 Income (loss) before taxes 479,040 350,855 134,131 344,909 252,616 Provision for (benefit from) income taxes 98,239 Net Income Opening Balance - Retained Earnings 750,953 573,338 344,909 252,615 75,000 1,020,862 750,953 Net Income Dividends 75 Closing Balance Retained Earnings