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?

CALCULATION HINTS:

1. Use 2006 ratios for your calculations
   1. Assume that Mr. Jones believes to meet daily requirements he must maintain at least 1% of cash relative to sales
   2. Calculate depreciation
      1. Explanation: Paolo always includes a line for depreciation in his examples, this number is important later when we calculate free cash flow. In the case, you are only given COGS which does not itemize depreciation. (Given COGS = True COGS + depreciation). We would like to separate out the depreciation so that we can make logical assumptions about it and use it in calculations later. By looking at the balance sheet you can use the change in accumulated depreciation to "back out" what the depreciation was. (Given COGS [year t] = True COGS + (accum dep [year t] - accum dep [year t-1]. You report what you calculate for depreciation on a new line in your income statement and then report only the updated True COGS. Your net income should remain the same.
      2. For any analysis going forward, use NET fixed assets. You can completely ignore (to the point of not including it in your tables) the accumulated depreciation and gross fixed asset lines (after completing #5 above).
      3. Total current assets Q1 of 2007 = 755 which does not equal 32+290+432 = 754. So you can assume cash =33, thus the equality is true: 755=33+290+432.

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.

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