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

Average Joe's Gym

Statement of Financial Position

As at Dec 31

2014 2013

Assets

Current

Cash 235,359 134,550

Marketable Securities 145,780 457,206

Accounts Receivable 223,450 174,930

Inventory 425,770 355,790

Prepaid Expenses 17,500 19,500

1,047,859 1,141,976

Capital

Property and Equipment, net 2,756,950 2,492,655

TOTAL ASSETS 3,804,809 3,634,631

Liabilities and Shareholders' Equity

Current

Accounts Payable 294,305 95,700

Accrued and Other Liabilities 237,595 244,760

Current Portion of LongTerm Debt 375,900 345,900

907,800 686,360

Long Term Debt 1,280,330 1,601,500

Shareholders Equity

Common Shares (50,000 outstanding) 595,817 595,817

Retained Earnings 1,020,862 750,953

TOTAL LIABILITIES AND SHAREHOLDERS EQUITY 3,804,809 3,634,631

Average Joe's Gym

Income Statement

For the Year Ended December 31st

2014 2013

Sales 2,975,990 2,575,990

Cost of Sales 1,368,955 1,184,955

Gross Profit 1,607,035 1,391,035

Expenses

Amortization 155,490 125,490

General and Administrative 134,500 102,800

Marketing and Sales 175,680 155,600

Interest Expense 76,820 96,090

Office Expense 295,980 255,000

Wages and Benefits, Administration 315,000 315,000

Total Operating Expenses 1,153,470 1,049,980

Operating Income 453,565 341,055

Gain (losses) on marketable securities 25,475 9,800

Impairment loss on capital assets 0 0

Income (loss) before taxes 479,040 350,855

Provision for (benefit from) income taxes 134,131 98,239

Net Income 344,909 252,616

Opening Balance Retained Earnings 750,953 573,338

Net Income 344,909 252,615

Dividends 75,000 75,000

Closing Balance Retained Earnings 1,020,862 750,953

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

Ratio Industry Ave

Profitability 2014

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;
• ratio analyses;
• qualitative analyses; and
• appropriate recommendations given the case facts and analyses completed.