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 Nelson's Jones' estimate that a $350,000 line of credit will be sufficient for 2007 accurate? (7 pts.) o 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 Jones' net income for 2006 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.) o 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. Use the Excel template located here. A B D E F G H 1 FY 2007 Projected Income Statement 2 3 2007P Take Discounts Skip Discounts 2006 $2,242 $1,818 $424 $0 $0 4 5 Net sales 6 Cost of goods sold 7 Gross profit on sales 8 9 Operating expense 10 Interest expense 11 Net income before taxes 12 13 Provision for income taxes 14 Net income $347 $31 $46 $0 $0 $16 $30 $0 $0 15 16 17 December 31, 2007 Projected Balance Sheet 18 19 December 31, 2007P Take Discounts Skip Discounts 2006 $23 $264 $379 $666 $0 $0 $118 $784 $0 $0 20 21 Cash 22 Accounts receivable 23 Inventory 24 Total current assets 25 26 Property, net 27 Total assets 28 29 Accounts payable 30 Line of credit payable 31 Accrued expenses 32 Long term debt, current portion 33 Current liabiliities 34 35 Long-term debt 36 Total liabilities 37 38 Net worth 39 Total liabilities and net worth Plug this value to balance the balance sheet $120 $249 $14 $24 $407 $0 $0 ol $134 $541 $0 50 $0 lo $243 $784 $0 $0 40 41 Error check $0 $0.0 $0.0 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 Nelson's Jones' estimate that a $350,000 line of credit will be sufficient for 2007 accurate? (7 pts.) o 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 Jones' net income for 2006 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.) o 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. Use the Excel template located here. A B D E F G H 1 FY 2007 Projected Income Statement 2 3 2007P Take Discounts Skip Discounts 2006 $2,242 $1,818 $424 $0 $0 4 5 Net sales 6 Cost of goods sold 7 Gross profit on sales 8 9 Operating expense 10 Interest expense 11 Net income before taxes 12 13 Provision for income taxes 14 Net income $347 $31 $46 $0 $0 $16 $30 $0 $0 15 16 17 December 31, 2007 Projected Balance Sheet 18 19 December 31, 2007P Take Discounts Skip Discounts 2006 $23 $264 $379 $666 $0 $0 $118 $784 $0 $0 20 21 Cash 22 Accounts receivable 23 Inventory 24 Total current assets 25 26 Property, net 27 Total assets 28 29 Accounts payable 30 Line of credit payable 31 Accrued expenses 32 Long term debt, current portion 33 Current liabiliities 34 35 Long-term debt 36 Total liabilities 37 38 Net worth 39 Total liabilities and net worth Plug this value to balance the balance sheet $120 $249 $14 $24 $407 $0 $0 ol $134 $541 $0 50 $0 lo $243 $784 $0 $0 40 41 Error check $0 $0.0 $0.0
