Q3: Should Jones try to increase their access to debt financing given the price discount offered?

Try to figure out the annual interest rate that the supplier is effectively charging.

a. 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?

b 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 , 2001- 2006 , and for the first quarter 2007 Q1 2004 2005 2006 2007 a Net sales $1 , 624 $1, 916 $2, 242 $608 Cost of goods sold $1 , 304 $1 , 535 $1 , 818 $499 Gross profit on sales $320 $381 $424 $109 Operating expense " $272 $307 $347 $94 Interest expense* $27 $30 $31 85 Net income before taxes $21 $44 $46 $7 Provision for income taxes $7 $15 $16 $2 Net income* $14 $29 $30 $5 Exhibit 2: Balance Sheet ( thousands of dollars ) as of December 31 , 2004 - 2006 and March 31 , 2007 Q1 2004 2005 20:06 2007 Cash $15 $53 $23 $33 Accounts receivable $187 $231 $264 $290 Inventory* $243 $278 $379 $432 Total Current Assets $475 $562 $666 $755 Property & equipment $187 $202 $252 $252 Accumulated depreciation* ( 574 ) (599 ) ( $134 ) $ 1 42 ) Total PP&E , net $113 $103 $118 $110 Total Assets $588 $665 $784 $865 Accounts payable* $36 $42 $120 $203 Line of credit payable $149 $214 $249 $250 Accrued expenses $13 $14 $14 $12 Long term debt , current portion $24 524 $24 $24 Total Current liabilities $222 $294 $407 $489 Long-term debt $182 $134 $128 Total liabilities $404 $452 $541 $617 Net worth $184 $213 $243 $248 Total Liabilities and Net Worth $588 $665 $784 $865