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.
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.

TIL KILI D DE FL Exhibit 1: Income Statements (thousands of dollars) for Years Ending December 31, 2004-2006, and for the first quarter 2007 Exhibit 2: Balance Sheet (thousands of dollars) as of December 31, 2004-2006 and March 31, 2007 Net sales Cost of goods sold Gross profit on sales 2004 $1,624 $1,304 $320 2005 $1,916 $1,535 $381 2006 $2,242 $1,818 $424 Q1 2007 a $608 $499 $109 Cash Accounts receivable Inventory Total Current Assets Property & equipment Accumulated depreciation Total PP&E, net 2004 $45 $187 $243 $475 $187 ($74) $113 2005 $53 $231 $278 $562 $202 ($99) $103 2006 $23 $264 $379 $666 $252 ($134) $118 Q1 2007 $33 $290 $432 $755 $252 ($142) $110 Operating expense Interest expense Net income before taxes $272 $27 $21 $307 $30 $44 $347 $31 $46 $94 $8 $7 12 Total Assets $588 $665 $784 $865 $7 Provision for income taxes Net income $15 $29 $16 $30 $14 $5 Accounts payable Line of credit payable Accrued expenses Long term debt, current portion Total Current liabilities $36 $149 $13 $24 $222 $42 $214 $14 $24 $294 $120 $249 $14 $24 $407 $203 $250 $12 $24 $489 Long-term debt Total liabilities $182 $404 $158 $452 $134 $541 $128 $617 Net worth Total Liabilities and Net Worth $184 $588 $213 $665 $243 $784 $248 $865 TIL KILI D DE FL Exhibit 1: Income Statements (thousands of dollars) for Years Ending December 31, 2004-2006, and for the first quarter 2007 Exhibit 2: Balance Sheet (thousands of dollars) as of December 31, 2004-2006 and March 31, 2007 Net sales Cost of goods sold Gross profit on sales 2004 $1,624 $1,304 $320 2005 $1,916 $1,535 $381 2006 $2,242 $1,818 $424 Q1 2007 a $608 $499 $109 Cash Accounts receivable Inventory Total Current Assets Property & equipment Accumulated depreciation Total PP&E, net 2004 $45 $187 $243 $475 $187 ($74) $113 2005 $53 $231 $278 $562 $202 ($99) $103 2006 $23 $264 $379 $666 $252 ($134) $118 Q1 2007 $33 $290 $432 $755 $252 ($142) $110 Operating expense Interest expense Net income before taxes $272 $27 $21 $307 $30 $44 $347 $31 $46 $94 $8 $7 12 Total Assets $588 $665 $784 $865 $7 Provision for income taxes Net income $15 $29 $16 $30 $14 $5 Accounts payable Line of credit payable Accrued expenses Long term debt, current portion Total Current liabilities $36 $149 $13 $24 $222 $42 $214 $14 $24 $294 $120 $249 $14 $24 $407 $203 $250 $12 $24 $489 Long-term debt Total liabilities $182 $404 $158 $452 $134 $541 $128 $617 Net worth Total Liabilities and Net Worth $184 $588 $213 $665 $243 $784 $248 $865