Johnson Company

The Johnson company wants to increase its sales and would like to seek additional borrowing. The companys management and investors are concerned about the firms survival and its expansion plans. The President wants to improve the financial condition of the company and wants to make sure that the company can survive in the short term. The companys 2015 actual balance sheet is given and its projected 2016 projected balance sheet is based on getting additional financing.

You are a newly hired Berkeley MBA graduate, and the president of the company wants you to conduct an analysis of the companys financial position, and recommend what steps or actions Johnson must take to improve its financial health.

Balance Sheet

Projected 2016 ACTUAL 2015

Cash $ 85,632 $ 7,282

Accounts receivable 878,000 632,160

Inventories 1,716,480 1,287,360

Total current assets $ 2,680,112 $ 1,926,802

Gross fixed assets 1,197,160 1,202,950

Less accumulated depreciation 380,120 263,160

Net fixed assets $ 817,040 $ 939,790

Total assets $ 3,497,152 $ 2,866,592

Liabilities and Equity

Accounts payable $ 436,800 $ 524,160

Notes payable 300,000 636,808

Accruals 408,000 489,600

Total current liabilities $ 1,144,800 $ 1,650,568

Long-term debt 400,000 723,432

Common stock 1,721,176 460,000

Retained earnings 231,176 32,592

Total equity $ 1,952,352 $ 492,592

Total liabilities and equity $ 3,497,152 $ 2,866,592

Income Statement

2016

Sales $ 7,035,600

Cost of goods sold 5,875,992

Other expenses 550,000

Total operating costs excluding depreciation $ 6,425,992

EBITDA $ 609,608

Depreciation 116,960

EBIT $ 492,648

Interest expense 70,008

EBT $ 422,640

Taxes (40%) 169,056

Net income $ 253,584

Ratio Analysis

Industry

2016 Average

Current 2.7

Quick 1.0

Inventory turnover 6.1

Days sales in receivables 32.0

Total assets turnover 2.6

Total Debt ratio 50% Times interest earned 6.2

Operating margin (EBIT) 7.3%

Net Profit margin 3.5%

ROA 9.1%

ROE 18.2%

Gross Profit Margin NA

Answer the following questions

Calculate the ratios for Johnson in 2016 and analyze and compare these ratios to the industry average ratios. (30%)

What do you think about the companys financial health? Explain in detail and provide your recommendations for improving the companys health. (15%)

What is the internal and sustainable growth rate of the company if it plows back or retains 70% of its earnings? What do these growth rates indicate? (20%)

Calculate the 2016 Free Cash Flows for Johnson (25%)

As a banker, will you give Johnson a loan in 2016? Explain in detail the financial reasons based on the ratios. (10%)