the Jones Case (10 points)

What is the implied cost (interest rate) of skipping a 2% discount on suppliers for a $1,000 invoice? (Easy: check out Section 15-9 in the textbook) (0.5 pts.) Given what you have learned about working capital management and financial planning, is Nelsons Jones estimate that a $350,000 line of credit will be sufficient for 2007 accurate? (7pts.)

Create an Excel workbook with forecasted balance sheet, income statement and cash flow for 2007 Assume two scenarios, 1) with discounts from suppliers taken and 2) without Based on the 2006 net income amount and assuming it is constant going forward, how long will it take for Jones to pay off a $350,000 loan? (0.5 pts.) What could Jones do to reduce the size of the line of credit he needs? (2 pts.)

Support your recommendation(s) (Hint: What rate of growth can Jones pursue that is sustainable? Does he need to change his capital structure?) Assumptions 1. Sales volume for 2007 will be $2.7m 2. The historical relations that prevailed in 2004-06 will continue in 2007.1. Operating expense remains at 15.5% of sales 2. Interest expense is assumed to be flat at $31,000 3. Accounts receivable remains at 43 days of sales. 4. Inventory remains at 76 days of COGS 5. $24,000 of long-term debt principal is repaid during 2007 6. Cash, PP&E, accrued expenses dollar balances are unchanged in 2007. In the case of PP&E this assumes that depreciation = capex in 2007. 3. COGs will be flat at 81.1% if Jones takes 100% of the discounts available in 2007 but will increase 2.0% to 83.1% in 2007 if Jones does not take the discounts available. 4. Use the Excel template provided.

4179 I Jones Electrical Distribution Exhibit 1 Operating Statements for Years Ending December 31, 20042006, and for First Quarter 2007 (thousands of dollars) 2004 2005 2006 $ 1,624 $ 1.304 $ 320 $1,916 $ 1.535 $2,242 $ 1.818 First Quarter 2007 a $ 608 $ 499 $ 109 $ 381 $ 424 Net sales Cost of goods sold Gross profit on sales Operating expenseb Interest expense Net income before taxes $ 272 $ 27 21 $ 307 $ 30 $ 44 $ 347 $ 31 $ 46 $ 94 $ 8 $ Z Provision for income taxes Net income S $ z 14 $ $ 15 29 16 $ 30 $ 2 5 In the first quarter of 2006, sales were $514,000 and net income was $4,000. Operating expenses include a normal level of cash salary for Mr. Jones in all periods b Jones Electrical Distribution | 4179 Exhibit 2 Balance Sheet at December 31, 2004-2006, and March 31, 2007 (thousands of dollars) 2004 2005 2006 $ 45 $ 187 $ 243 $ 475 $ 53 $ 231 $ 278 $ 562 $ 23 $ 264 $ 379 $ 666 Cash Accounts receivable Inventory Total current assets Property & equipment Accumulated depreciation Total PP&E, net Total assets Accounts payable Line of credit payable Accrued expenses Long-term debt, current portion Current liabilities Long-term debt Total liabilities $ 187 ($_74) $ 113 $ 588 $ 36 $ 149 $ 13 $_24 $ 222 $ 202 ($ 99) $ 103 $ 665 $ 42 $ 214 $ 14 $24 $ 294 $ 252 ($ 134) $ 118 $ 784 $ 120 $ 249 $ 14 $ 24 $_407 First Quarter 2007 $ 32 $ 290 $ 432 $ 755 $ 252 ($ 142) $ 110 $ 865 $ 203 $ 250 $ 12 $_24 $_489 $ 128 $ 617 $ 182 $ 404 $ 158 $_452 $ 134 $ 541 $ 184 Net worth Total liabilities and net worth $ 213 $ 665 $ 243 $ 784 $ 248 $ 865 $ 588 4179 I Jones Electrical Distribution Exhibit 1 Operating Statements for Years Ending December 31, 20042006, and for First Quarter 2007 (thousands of dollars) 2004 2005 2006 $ 1,624 $ 1.304 $ 320 $1,916 $ 1.535 $2,242 $ 1.818 First Quarter 2007 a $ 608 $ 499 $ 109 $ 381 $ 424 Net sales Cost of goods sold Gross profit on sales Operating expenseb Interest expense Net income before taxes $ 272 $ 27 21 $ 307 $ 30 $ 44 $ 347 $ 31 $ 46 $ 94 $ 8 $ Z Provision for income taxes Net income S $ z 14 $ $ 15 29 16 $ 30 $ 2 5 In the first quarter of 2006, sales were $514,000 and net income was $4,000. Operating expenses include a normal level of cash salary for Mr. Jones in all periods b Jones Electrical Distribution | 4179 Exhibit 2 Balance Sheet at December 31, 2004-2006, and March 31, 2007 (thousands of dollars) 2004 2005 2006 $ 45 $ 187 $ 243 $ 475 $ 53 $ 231 $ 278 $ 562 $ 23 $ 264 $ 379 $ 666 Cash Accounts receivable Inventory Total current assets Property & equipment Accumulated depreciation Total PP&E, net Total assets Accounts payable Line of credit payable Accrued expenses Long-term debt, current portion Current liabilities Long-term debt Total liabilities $ 187 ($_74) $ 113 $ 588 $ 36 $ 149 $ 13 $_24 $ 222 $ 202 ($ 99) $ 103 $ 665 $ 42 $ 214 $ 14 $24 $ 294 $ 252 ($ 134) $ 118 $ 784 $ 120 $ 249 $ 14 $ 24 $_407 First Quarter 2007 $ 32 $ 290 $ 432 $ 755 $ 252 ($ 142) $ 110 $ 865 $ 203 $ 250 $ 12 $_24 $_489 $ 128 $ 617 $ 182 $ 404 $ 158 $_452 $ 134 $ 541 $ 184 Net worth Total liabilities and net worth $ 213 $ 665 $ 243 $ 784 $ 248 $ 865 $ 588