Jackson Automotive System - Term Paper Example

Contents Contents 1 Company background 2 Major company development in 2012 and 2013 3 The need for new loan 4 Pro Forma Income Statement 5 Projecting the last 4 months for the financial period ending 2013 5 Assumptions 8 Sensitivity Analysis 8 Extending the loan period 9 Why the company repurchased its loan 9 The company’s proposed dividend payout in 2013 10 Bibliography 11 Company background Jackson automotive system was created in the year 1961 by the father of Larry Edwards. He was the president of Jackson in the year 2013, and took over the business from his father in the mid 1960. Under the leadership of Edward, Jackson underwent drastic expansion and recorded production n the mid 2000. Edward focused on innovation more specifically in the design of energy effectiveness auto system that attracted new clients for their cutting edge products. Moreover, Edward triumphantly led he business thought the year 2008 to 2009 worldwide recession when a lot of companies depicted a steady rebuilding of revenue inclusive of important backlog of orders at the time of loan request. In the year 2013, Jackson was on path for the initial year of capability sales as from 2007. Why can’t profitable company like Jackson repay its loan on time? In spite of the profit made by the company, the business may be experiencing financial hard times in creating cash flows from operations as the profit might not be converted into cash. It may be as a result of growth in current asset like the inventories or accounting receivables. As outlined in the case that the inventories grew from $7.154 million to $ 12.163 million which was the key problem for the business to create cash flows from operating activities to pay its loan on time. The main justification why Jackson is not in a position of repaying the loan is as a result of interruption in main electronic constituent for the newly designed air conditioning system. Not just did Jackson had financial insufficiency of repaying the debt outstanding by end of June, but they also needed to grow its credit facilities to service normal business operations. Provided the shortfall, Edward made a request to Michigan state bank for an extension of the current loan till September 2013 and an extra loan of $2.4 million to fund the new asset bought. The extra loan may be required by end of July and might be payable at end of September with monthly interest of 5% of the principal amount. Edward explained that Jackson had incurred small on new asset purchase on the last years as a result of their wish of conserving cash amid poor economic situations. nevertheless, some important constituent of the equipment were worn out and it was important that they undertake a replacement so as to get rid of any production disturbance in the foreseeable future, the new asset might have an approximated life of 20 years with zero salvage value and deprecated on a straight-line basis (Damodaran, 2010).. Major company development in 2012 and 2013 In the year 2012, Edward settled on repurchasing stocks from a group of rebellious shareholders. Edward approached Heather James at the Michigan state bank where Jackson held cash balances, for a short term loan of $5 million to make easy the stock repurchase. The short term loan in excess of $5 million was intended for to be used on the statement of financial position and the new short tem loan of$5 million to buy 1 million shares of Jackson valued at $1 par value stock from the shareholders. The buyback might lead to 40% reduction in the number of shares outstanding subsequent to the repurchase being completed. As an aid for the loan request, Edward provided a monthly shipment forecast for the financial period 2013 as depicted in exhibit 1., the statement of financial position as at August 2012 (First column in exhibit 2) an records of backlog of sales orders. Jackson had occasionally ensured a strong working portion as well as conventional financial policies. The company carried no debt on its statement of financial position as from 2002. James was certain that Jackson might have no problem in service the debt and positively permitted the loan request, Jackson took the loan at end of September 2012 to use in stock repurchase right way. The terms of the loan were such that Jackson was committed to making monthly interest payment at an annual interest of 6% on the principal amount at paying off the balance of the loan at the end of June 2013. Subsequent to loan commencement , Edward frequently sent the bank income statement and statement of financial position recording Jackson financial situation (Ehrhardt, 2008). The need for new loan At the start of June, Jackson realized that he is in hard times. In preparing the loan request, Edward provided the bank with the revised sales forecast for the June to September 2013 as depicted in exhibit 1. Edward realized that the bi three automotive assembly plant and experienced a double revenue expansion by May 2013. This was an indication of fast economic growth and recovery. As a result, they forecasted improved revenue for the last 4 months of financial period 2013, furthermore, Edward explained to James that the shortfalls in sales for the month April and May were as a result of recent disturbance of shipments. Jackson had to wait for the installation of some main electronic constituent for the new designed air condition system that lead to delay in the order accomplishments (Henderson, 2015). In this regards, he activated to in a position of reducing the work in progress of $5040000 by June. The remaining work in progress inventory might remain steady till the end of the year as a result of production capability. Edward argued that Jackson had been producing at capability for the last few months and anticipated to continue at the same rate to the end of the year. As at may 2013, Jackson backlog of unfilled orders from clients was estimated at 90% of the annual capability of the company. Edward provided the bank with monthly statement of financial position and income statement for the 9 months. As from September 2012 to may 2013 as depicted in exhibit 2 And 3. As it may 2013, the cash balances Jackson were $4994000. Pro Forma Income Statement Forecast as at June 1, 2013 Edwards required a repurchase 40% of the outstanding common shares of stock worth $10 million dollars as a result to some rebellious shareholders. The $5 million of was from the reserves of cash and the remaining value of $5 million was from a 10 month short term loan. Issues Projecting the last 4 months for the financial period ending 2013 A request of four month extension on the $5 million loan that was taken out in 2012 to fund the stock repurchases. Request of extra $2.4 million short term loan for upgrading the equipment Requesting an additional $2.4 million short-term to upgrade equipment due to Edward's emphasis on specialized production lines . Cash Budget           All in thousand in $             June July August Sept. Total Beginning Cash Balance $ 4,994.00 $ 1,615.00 $ 9,212.00 $ 11,214.00 $ 4,994.00 Cash Receipts:           Collection of Accounts Receivable $ 3,744.00 $ 13,581.00 $ 7,974.00 $ 7,201.00 $ 32,500.00 Interest Income $ 8.32 $ 2.69 $ 15.35 $ 18.69 $ 45.06 Bank Loan $ 2,400.00       $ 2,400.00 Total Cash Inflow $ 6,152.32 $ 13,583.69 $ 7,989.35 $ 7,219.69 $ 34,945.06 Cash Disbursements:           Payments of Accounts Payable $ 5,969.00 $ 5,200.00 $ 5,200.00 $ 5,200.00 $ 21,569.00 Operating Expenses $ 750.00 $ 750.00 $ 750.00 $ 750.00 $ 3,000.00 Capital Expenditure $ 2,400.00       $ 2,400.00 Tax Payments $ 375.00     $ 375.00 $ 750.00 Interest Payments $ 37.00 $ 37.00 $ 37.00 $ 37.00 $ 148.00 Principal Payments       $ 7,400.00 $ 7,400.00 Dividend Payments       $ 1,200.00 $ 1,200.00 Total Cash Outflow $ 9,531.00 $ 5,987.00 $ 5,987.00 $ 14,962.00 $ 36,467.00 Net Cash Inflow (outflow) $ (3,378.68) $ 7,596.69 $ 2,002.35 $ (7,742.31) $ (1,521.94) Ending Cash Balance $ 1,615.32 $ 9,212.02 $ 11,214.37 $ 3,472.06 $ 3,472.06             Pro Forma Income Statement           All in thousand in $ June July August September Total Net Sales $ 14,481.00 $ 9,174.00 $ 7,801.00 $ 7,394.00 $ 38,850.00 -COGS $ 5,810.00 $ 5,810.00 $ 5,810.00 $ 5,810.00 $ 23,240.00 Gross Profit $ 8,671.00 $ 3,364.00 $ 1,991.00 $ 1,584.00 $ 15,610.00 Operating Expenses $ 750.00 $ 750.00 $ 750.00 $ 750.00 $ 3,000.00 Depreciation and Amortization $ 130.00 $ 130.00 $ 130.00 $ 130.00 $ 130.00 Interest Expense $ 37.00 $ 37.00 $ 37.00 $ 37.00 $ 148.00 Interest Income $ 8.32 $ 2.69 $ 15.35 $ 18.69 $ 45.06 Profit (Loss) Before Tax $ 7,762.32 $ 2,449.69 $ 1,089.35 $ 685.69 $ 12,377.06 Income Taxes $ 2,639.19 $ 832.90 $ 370.38 $ 233.13 $ 4,075.60 Net Income $ 5,123.13 $ 1,616.80 $ 718.97 $ 452.56 $ 7,911.46 Dividends       $ 1,200.00 $ 1,200.00 Pro Forma Balance Sheet         All in thousand in $ June July August September Cash $ 1,615.32 $ 9,212.02 $ 11,214.37 $ 3,472.06 Account Receivable $ 12,681.00 $ 7,374.00 $ 7,201.00 $ 7,394.00 Inventory $ 11,553.00 $ 10,943.00 $ 10,333.00 $ 9,723.00 Current Assets $ 25,849.32 $ 27,529.02 $ 28,748.37 $ 20,589.06 Gross PPE $ 47,900.00 $ 47,900.00 $ 47,900.00 $ 47,900.00 Accumulated Depreciation $ 31,578.00 $ 31,708.00 $ 31,838.00 $ 31,968.00 Net PPE $ 16,322.00 $ 16,192.00 $ 16,062.00 $ 15,932.00 Prepaid Expenses $ 54.00 $ 54.00 $ 54.00 $ 54.00 Total Assets $ 42,225.32 $ 43,775.02 $ 44,864.37 $ 36,575.06 Accounts Payable $ 5,200.00 $ 5,200.00 $ 5,200.00 $ 5,200.00 Notes Payable $ 7,400.00 $ 7,400.00 $ 7,400.00 $ - Accrued Taxes $ 2,537.19 $ 3,370.09 $ 3,740.47 $ 3,598.60 Other Accrued Expense $ 1,142.00 $ 1,142.00 $ 1,142.00 $ 1,142.00 Customer Advance Payments $ 900.00 $ - $ - $ - Current Liabilities $ 17,179.19 $ 17,112.09 $ 17,482.47 $ 9,940.60 Shareholders’ Equity $ 25,046.13 $ 26,662.93 $ 27,381.90 $ 26,634.46 Total Liabilities & Equity $ 42,225.32 $ 43,775.02 $ 44,864.37 $ 36,575.06 From the above analysis, it is evident that the company will in a position of repaying its debts according to forecasted cash budget above, but it based on the high revenue in the month of June. Where the sales are not forecasted then the company will not be in a position of paying its loan on time (In September as per the loan repayment schedule (Shi, 2001). Assumptions The key critical aspect is to grow the sale in the year 2013 in relation to the similar period of the year 2012. Where this forecast is not met by the company, then the business will not be in a position of meeting the cash balances as depicted in the cash budget above. It it’s likely that the business ignored the effect of inflation and it’s assumed that the inflation effect will not exist since, we are making the cash budget for just four months. Sensitivity Analysis Sensitivity Analysis for 10% increase     Year End Cash Balance at present   $3,472.00 Collection against Sales $31,456.00   Increase of 10%   $3,145.60       Payment against COGS $15,600.00   Increase of 10%   $1,560.00       Payment against operating Expenses $3,000.00   Increase of 10%   $300.00 Adjusted Cash Balance will be   $8,477.60 Sensitivity Analysis for 10% Decrease     Year End Cash Balance at present   $3,472.00 Collection against Sales $31,456.00   Decrease of 10%   $3,145.60 Payment against COGS $15,600.00   Decrease of 10%   $1,560.00 Payment against operating Expenses $3,000.00   Decrease of 10%   $300.00 Adjusted Cash Balance will be   $2,186.40 Extending the loan period The bank might extend the loan period based on the future cash flows of the company. Where the sales are not according the anticipation of the company by June, then the bank will not be in a position of receiving the back. In this regards, the bank might handle the risk in a diverse approach as follows; The bank might ask for high interest rate more than then current 6% The bank may force the company to dispose its treasury stocks if the target for June on sales is not met The bank may ask for collateral of any asset for the business against its loan. Why the company repurchased its loan In the year 2012, Edward settled on repurchasing stocks from a group of rebellious shareholders. Edward approached Heather James at the Michigan state bank where Jackson held cash balances, for a short term loan of $5 million to make easy the stock repurchase. The short term loan in excess of $5 million was intended for to be used on the statement of financial position and the new short tem loan of$5 million to buy 1 million shares of Jackson valued at $1 par value stock from the shareholders. The buyback might lead to 40% reduction in the number of shares outstanding subsequent to the repurchase being completed. The business may have repurchased its own stock as a result of the following facts; The current share price may be low then the fair value and thus might have repurchased it in order to dispose the shares in the future at a high share prices. The owner of the company may be worry of loss of management control where the shares may be bought by other investors. The stock repurchase may depict a growth in the earning per share of the company and might lead to a reduction in the book value per share in the statement of financial position. The business will not need to pay the dividend on repurchased shares (Tessa Hebb, 2015). The company’s proposed dividend payout in 2013 According to the cash budget for the company, it is evident that business will be in position of paying the dividend despite the fact that sales growth or reduction in 10%. The payment of dividend will strengthen the trust of shareholders in the company and thus it may be financially healthy for the company’s share prices, but the value of dividend is 3 times as compared to what was paid in the last financial period which is quite abnormal and it may lead to a growth in anticipation of shareholders for the future dividends payments as well as when it might not be made the share price might decline and thus the business must follows the fixed and normal dividend payout ratio in order to create constancy in share prices (William Petty, 2015). Bibliography Camerinelli, E. (2012) Measuring the Value of the Supply Chain: Linking Financial. - Page 19. Damodaran, A. (2010) Applied Corporate Finance - Page 552, New York: Cingage Learning. Davies, H. (2013) Global Financial Regulation: The Essential Guide. Ehrhardt, M. (2008) Corporate Finance: A Focused Approach - Page 554, london: Cingage Learning. Hacioglu, Ü. (2013) Managerial Issues in Finance and Banking: A Strategic Approach, London: Cingage Learning. Henderson, S. (2015) Issues in Financial Accounting - Page 991, London: Cingage learning. James, W. (2015) Financial & Managerial Accounting - Page 992, London: John Wiley. Kaoma, K. (2006) Legal Aspects of Financial Services Regulation . King, A. (2006) Fair Value for Financial Reporting: Meeting the New FASB Requirement, London. Schuster, U.G.‎.N.&.‎. (2015) Investment Appraisal: Methods and Mode, New York: Cingage Learning. Shi, J. (2001) Handbook of Financial Analysis, Forecasting, and Modeling - Page 311, London. Tessa Hebb, ‎.P.H.‎.G.F.H. (2015) The Routledge Handbook of Responsible Investment. William Petty, ‎.T. (2015) Financial Management: Principles and Applications - Page 705, London: Springer. Read More